IC-NRLF 


181 


Money  Trust  Investigation. 


BRIEF  ON  BEHALF  OF  THE  NEW  YORK 
STOCK  EXCHANGE. 


JOHN  G.  MILBURN, 
WALTER  F.  TAYLOR, 

Counsel  for  The  New  York  Stock  Exchange 


C.  G.  BURGOYNE,  72  to  78  Spring  Street,  New  York. 


MONEY  TEUST  INVESTIGATION. 


BRIEF  ON  BEHALF  OF  THE  NEW  YORK 
STOCK  EXCHANGE. 


The  Resolution  of  the  House  of  Representatives,  No.  504, 
under  which  the  Committee  is  acting,  contains  among  its 
recitals  one  to  the  effect  that  it  has  been  charged  that  certain 
groups  of  financiers  are  "  enabled  to  use  the  funds  and  prop- 
erty of  the  great  national  banks  and  other  moneyed  corpora- 
tions in  the  leading  money  centers  to  control  the  security  and 
commodity  markets  ;  to  regulate  the  interest  rates  for  money  ; 
to  create,  avert,  and  compose  panics ;  to  dominate  the  New 
York  Stock  Exchange  and  the  various  clearing-house  associa- 
tions throughout  the  country,  and  through  such  associations 
and  by  reason  of  their  aforesaid  control  over  the  aforesaid 
railroads,  industrial  corporations,  and  moneyed  institutions, 
and  others,  and  in  other  ways  resulting  therefrom  have 
wielded  a  power  over  the  business,  commerce,  credits,  and 
finances  of  the  country  that  is  despotic  and  perilous 
and  is  daily  becoming  more  perilous  to  the  public  wel- 
fare." The  resolution  authorizes  the  Committee  to  investi- 
gate and  inquire  into  each  of  the  matters  recited  in 
the  preamble  and  among  other  things  to  inquire  into  and 
investigate  whether  and  to  lohat  extent.  "  (j)  The  manage- 
ment and  operations  of  the  New  York  Stock  Exchange  and  the 
New  York  Clearing  House  Association  are,  or  may  be,  directly 
or  indirectly,  dominated,  controlled,  or  otherwise  affected  by 
any  individuals  or  groups  of  individuals  who  control  or  are 
influential  in  directing  the  use  or  deposit  of  the  funds  of 
national  banks  in  the  City  of  New  York,  or  of  interstate  rail- 


340918 


way  or  industrial  corporations,  or  life  insurance  companies, 
and  the  relations  that  the  New  York  Stock  Exchange  and  the 
New  York  Clearing  House  bear  to  such  individuals  and  groups 
of  individuals  and  to  their  financial  transactions  and  to  our 
commercial  and  financial  systems  and  to  interstate  and  foreign 
commerce ;  (k)  Any  individual,  firm,  or  corporation,  or  any 
one  or  more  groups  of  such  individuals,  firms,  or  corporations, 
may  or  can  affect  the  security  markets  of  the  country  through 
the  New  York  Stock  Exchange,  or  can  create,  avert,  or  com- 
pose panics  by  the  control  of  the  use  and  disposition  of 
moneys  in  the  banks  and  other  moneyed  or  other  corporations 
that  are  controlled  by  such  individual,  firm,  or  corporation,  or 
by  other  means." 

These,  we  believe,  are  the  only  parts  of  the  Eesolution 
under  which  the  Committee  is  acting  that  refer  to  the  New 
York  Stock  Exchange. 

The  inquiry,  so  far  as  the  New  York  Stock  Exchange  is 
concerned,  has  taken  a  range  far  beyond  the  specific  questions 
formulated  by  the  resolution.  It  could  not  have  been  broader 
if  everything  pertaining  to  the  constitution,  government  and 
management  of  the  Exchange,  and  the  conduct  of  its  members 
and  their  relations  to  whoever  has  dealings  with  them,  had 
been  involved.  This  is  our  excuse  for  discussing  the  subject 
so  comprehensively.  If  the  only  matter  for  consideration 
was,  whether  any  group  of  financiers  or  individuals  dominates 
in  any  degree  the  Exchange,  or  through  it,  the  security 
markets  of  the  country,  we  should  not  have  deemed  it  neces- 
sary to  request  the  privilege  of  submitting  a  brief. 

Statement, 

The  New  York  Stock  Exchange  is  a  voluntary  unincor- 
porated association  consisting  of  1100  members.  It  may  be 
sued  in  the  name  of  its  president  or  treasurer,  as  may  any 
other  voluntary  unincorporated  association,  under  the  pro- 


3 

visions  of  the  New  York  Code  of  Civil  Procedure.  The  object 
of  the  association,  as  stated  in  its  constitution,  is  "  to  furnish 
exchange  rooms  and  other  facilities  for  the  convenient  transac- 
tion of  their  business  by  its  members,  as  brokers  ;  to  main- 
tain high  standards  of  commercial  honor  and  integrity  among 
its  members,  and  to  promote  and  inculcate  just  and  equitable 
principles  of  trade  and  business." 

The  Exchange  owns  the  stock  of  the  Stock  Exchange 
Building  Company,  which  owns  the  building  popularly  known 
as  the  Stock  Exchange.  It  also  owns  the  securities  of  the 
New  York  Quotation  Company,  which  operates  a  ticker  service, 
and  supplies  quotations  to  members  of  the  Exchange  at  their 
offices  south  of  Chambers  Street.  The  principal  sources  of  its 
income  are  the  dues  paid  by  its  members,  the  amounts  re- 
ceived from  the  New  York  Quotation  Company  and  from  the 
Western  Union  Telegraph  Company  for  its  quotations,  and 
fees  charged  by  it  upon  the  listing  of  stocks  and  bonds. 

The  Building  Company  leases  to  the  Exchange  the  rooms 
and  offices  it  uses. 

The  quotations  to  whicli  we  have  referred  are  the  quota- 
tions of  transactions  upon  the  floor  of  the  Exchange  collected 
by  its  employees  as  the  transactions  occur,  and  immediately 
transmitted  to  the  operators  of  the  New  York  Quotation  Com- 
pany and  the  Western  Union  Telegraph  Company,  by  whom, 
respectively,  they  are  sent  out  over  their  tickers.  The  Western 
Union  Telegraph  Company  furnishes  the  quotations  to  mem- 
bers of  the  Exchange  in  the  City  of  New  York  north  of 
Chambers  Street,  to  such  other  persons  and  corporations  in 
the  City  of  New  York  as  are  approved  by  the  Exchange,  and 
to  its  patrons  in  other  cities  in  the  State  of  New  York  and 
elsewhere.  It  is  prohibited  from  furnishing  the  quotations  to 
any  person,  firm  or  corporation  engaged  in  a  bucket  shop 
business. 

The  Exchange  does  no  business  unless  the  matters  to 
which  we  have  referred  are  considered  to  constitute  "  doing 
business." 


The  Exchange  is  not  open  to  the  public,  no  one  being 
allowed  to  trade  on  its  floor  except  its  own  members.  All 
transactions  on  the  floor  are  transactions  between  members,, 
who  contract  in  their  own  names,  whether  for  themselves, 
or  on  behalf  of  undisclosed  principals.  The  only  people 
who  buy  or  sell,  or  transact  any  other  business,  on  the  floor 
of  the  Exchange  are  its  members  acting  for  themselves  or 
others. 

There  are  certain  rules  of  the  Exchange  that  affect  the 
contracts  which  may  be  entered  into  between  brokers  and 
their  principals.  In  the  main,  however,  the  relations  between 
members  and  their  customers  do  not  come  within  the  cogni- 
zance of  the  Exchange  so  long  as  there  is  no  violation  of 
equitable  principles  of  trade. 

Whether  a  customer  who  gives  an  order  to  purchase  stock 
is  to  pay  for  it  in  full,  or  to  pay  part  of  the  purchase  pricer 
borrowing  the  balance  from  the  broker  and  leaving  the  stock 
with  him  as  security  ;  whether,  and  to  what  extent,  the  broker 
may  pledge  the  stock  so  left  with  him  to  secure  the  money  he 
advances  to  the  customer  ;  whether^  a  customer  who  orders  a 
broker  to  sell  stock  has  already  furnished  him  with  the  stock 
to  make  delivery,  or  is  to  furnish  him  with  the  stock  before 
the  date  of  delivery,  or  depends  upon  the  broker  to  procure 
for  his  account  the  stock  with  which  to  make  delivery,  are  all 
matters  that  depend  upon  the  contract  or  arrangement  between 
the  broker  and  his  customer.  When  one  broker  sells  stock 
to  another  he  does  not  know  whether  the  purchasing  broker  is 
purchasing  the  stock  on  margin,  or  for  a  customer  who  has 
paid  for  it  outright,  or  for  his  own  account.  A  broker  who 
buys  from  another  broker  does  not  know  whether  the  selling 
broker  is  selling  the  stock  short,  or  on  his  own  account,  or  for 
the  account  of  a  customer.  A  purchase  made  for  a  margin 
account  or  a  short  sale  is,  to  all  outward  appearances,  so  far 
as  the  seller  in  one  case,  or  the  buyer  in  the  other  case,  ia 
concerned,  just  like  any  other  purchase  or  sale. 


Just  as  the  Exchange  has  no  direct  concern  with  the  con- 
tracts between  brokers  and  their  principals,  so  long  as  there  is 
no  violation  of  equitable  principles  of  trade,  it  has  no  direct 
concern  with  the  terms  upon  which  members  borrow  money 
from  banks  to  carry  their  customers'  accounts,  or  with  the 
collateral  pledged  to  secure  the  money  so  borrowed.  These 
are  matters  that  are  worked  out  between  the  lending  banks 
and  the  borrowing  brokers. 

The  rules  of  the  Exchange  absolutely  require  that  all 
transactions  upon  the  floor  shall  be  real  transactions ;  and 
that  every  contract  to  purchase  or  sell  shall  contemplate  actual 
delivery  of  the  security,  and  shall  be  followed  by  such  de- 
livery. The  rules  do  not  countenance  trading  in  differences. 
The  usual  and  regular  contract  calls  for  payment  and  delivery 
upon  the  day  following  the  contract  (Constitution,  page  46). 

The  only  securities  dealt  in  upon  the  Exchange  are  those 
that  have  been  admitted  to  the  Stock  List  by  the  officials  of 
the  Exchange,  who  have  the  power  at  any  time  to  strike  a 
security  from  the  list,  or  to  suspend  dealings  in  a  security 
upon  the  floor.  Members  of  the  Exchange,  elsewhere  than  upon 
the  floor  of  the  Exchange,  may  deal  in  unlisted  securities  as 
freely  as  any  one  else. 

The  number  of  issues  of  stock  listed  on  the  Exchange 
is  555,  and  the  number  of  bond  issues  1,026.  The  num- 
ber of  issues  listed  is  very  small  in  comparison  with  the  total 
number  of  issues  of  corporations  throughout  the  country, 
though  the  aggregate  amount  of  securities  listed  bears  a 
very  much  higher  proportion  to  the  aggregate  amount  of  all 
securities,  the  listed  issues  including  many  great  issues  and 
comparatively  few  that  are  small. 

The  listing  of  a  security  is  an  assurance  that  there  has  been 
a  compliance  with  the  requirements  preliminary  to  listing. 

In  the  early  days  of  the  Exchange  the  requirements  for  the 
listing  of  a  security  were  of  minor  importance  ;  but  they  have 
been  gradually  made  more  and  more  stringent.  The  purpose 


6 

of  the  requirements  is  the  protection  of  those  who  trade  in 
securities  listed  upon  the  Exchange. 

Every  corporation  applying  to  list  securities  must  agree 
not  to  dispose  of  its  interests  in  any  constituent  company  with- 
out the  consent  of  its  stockholders,  and  to  publish  at  least  once 
in  each  year,  and  submit  to  its  stockholders  at  least  fifteen  days 
in  advance  of  its  annual  meeting,  a  detailed  statement  of  its 
physical  and  financial  condition  ;  an  income  account  covering 
the  previous  fiscal  year  ;  a  balance  sheet  showing  assets  and 
liabilities  at  the  end  of  the  year,  and  an  income  account  and 
balance  sheet  of  all  its  subsidiary  companies.  A  railroad 
company  must  state,  among  other  things,  the  location  and 
route  of  its  road  ;  its  total  mileage  and  character  of  its  prop- 
erty ;  contemplated  extensions ;  total  equipment ;  mortgage 
liens  ;  other  indebtedness  or  liabilities  ;  its  various  issues  of 
securities  and  application  of  proceeds /  its  income  account 
for  the  last  preceding  year,  and  a  balance  sheet.  Similar 
requirements  are  imposed  with  respect  to  the  listing 
of  railroad  bonds  and  the  securities  of  other 
corporations.  There  must  also  be  furnished  the  resolu- 
tion of  stockholders  and  directors  authorizing  the  issue ; 
opinion  of  counsel  as  to  the  legality  of  the  issue ;  the  report 
of  a  duly  qualified  engineer  covering  the  actual  physical  con- 
dition of  the  property  as  of  recent  date ;  and  other  documents 
bearing  upon  the  validity  of  the  issue,  and  the  properties 
which  it  represents  or  upon  which  it  is  a  lien. 

Since  1868  thirty  days'  notice  of  a  proposed  increase  in 
the  capital  stock  of  a  company  must  be  given  to  the  Exchange 
before  such  increase  may  be  admitted  to  dealings. 

Securities  are  not  listed  until  the  ownership  has  become 
distributed  and  diversified.  Whenever  the  great  bulk  of  any 
security  has  been  absorbed  by  a  single  interest  the  security  is 
stricken  from  the  list. 

Throughout  this  brief  our  use  of  the  term  u  securities  "  in- 
cludes stocks. 


Governor  Hughes  of  New  York  appointed  a  Commission  in 
December,  1908,  of  which  Mr.  Horace  White  was  chairman, 
to  ascertain  what  changes,  if  any,  were  advisable  in  the  laws 
of  the  State  bearing  on  speculation  in  securities  and  com- 
modities, or  relating  to  the  protection  of  investors,  or  with 
regard  to  the  instrumentalities  and  organizations  used  in  deal- 
ing in  securities  and  commodities  which  are  the  subject  of 
speculation.  This  Commission,  after  an  exhaustive  study  of 
the  subject,  made  its  report  in  June,  1909. 

Among  the  principal  conclusions  of  the  Commission  were  : 

(1)  Purchasing   securities   on   margin   is   as   legitimate   a 
transaction   as   the   purchase   of   any  other  property  in  which 
part  payment  is  deferred. 

(2)  "  Short   sales  "  are   perfectly   legitimate   and   of   sub- 
stantial advantage  to  the  community. 

(3)  The  Stock  Exchange  clearing-house  is   essential  to  en- 
able the  Exchange  to  do  its  necessary  and  legitimate  business. 

(4)  The  Stock  Exchange  under   its   present   organization, 
that  is,  unincorporated,  is  a  more  potent  instrument   for   the 
accomplishment  of  good  than  it  would  be  if  incorporated. 

(5)  The   statute    excepting   call   loans,  secured   by   ware- 
house  receipts,  bills   of  lading,  bills   of   exchange,  and   other 
negotiable  instruments,  from  the  operation  of   the  usury  laws 
operates  beneficially,  and  its  repeal  is  inadvisable. 

(6)  The  efforts   of   the   Stock  Exchange  to  control  the  dis- 
tribution of  its  quotations  were  fully  approved,  and  legislation 
enabling  it  more  effectually  to  prevent   these  quotations  from 
being  transmitted  to  bucket  shops  was  recommended. 

The  report  contained  a  number  of  suggestions  and 
recommendations. 

It  suggested  that  brokers  discourage  speculation  upon 
small  margins,  and  that  the  Exchange  use  its  influence,  and,  if 
necessary,  its  power  to  prevent  members  from  soliciting  and 
accepting  business  as  a  general  thing  on  a  less  margin  than 
twenty  per  cent.  The  Exchange  has  not  taken  any  action  upon 


this  recommendation,  for  the  reason  that  it  has  deemed  that 
such  a  rigid  rule  would  unduly  eliminate  the  element  of  per- 
sonal credit,  and  for  the  further  reason  that,  as  stated  by  the 
Commission  itself,  "  the  amount  of  credit  which  one  person  may 
extend  to  another  is  a  dangerous  subject  on  which  to  legislate." 

Another  suggestion  related  to  the  regulation  of  pyramiding, 
but  this  was  not  practical. 

Manipulation  was  discussed  in  the  report.  The  impossi- 
bility of  preventing  it  altogether  was  recognized ;  one  form 
of  it  was  held  to  be  justifiable,  and  it  was  suggested  that 
the  forms  of  it  which  were  condemned  might  be  prevented 
through  the  exercise  by  the  Exchange  of  its  influence  and 
authority  over  its  members.  The  views  of  the  Exchange  upon 
the  subject  of  manipulation  are  set  out  below. 

The  report  recommended  that  the  Exchange  adopt  a  rule 
conferring  upon  the  Governing  Committee  power  to  de- 
cide when  a  corner  exists  and  to  fix  a  settlement  price. 
This  recommendation  the  Exchange  has  not  acted  upon  ;  and 
it  has  not  appeared  to  be  urgent.  There  have  been  only  two 
corners  in  many  years.  The  last  was  the  Northern  Pacific 
corner  in  1901. 

A  further  recommendation  was  that  the  books  and  accounts 
of  the  members  should  be  subjected  to  periodic  examination 
and  inspection  by  the  Exchange.  The  Exchange  has  not 
adopted  this  recommendation  further  than  to  authorize  its 
Law  Committee  to  examine  into  the  dealings  of  any  member. 
There  is  naturally  great  opposition  on  the  part  of  the  members 
to  such  inquisitorial  scrutiny  and  disclosure  of  their  affairs, 
which  they  jealously  regard  as  private  and  confidential. 

The  report  stated  the  existing  law  as  to  the  hypothecation 
of  securities  by  brokers,  and  recommended  that  the  Legisla- 
ture adopt  a  statute  making  the  wrongful  disposition  of  a  cus- 
tomer's securities  larceny.  This  was  a  recommendation  ad- 
dressed to  the  Legislature  for  its  action. 

It  was  recommended  that  the  rule  forbidding  any  member 


to  deal  or  carry  an  account  for  a  clerk  or  employee  of  another 
member  should  be  extended  to  prevent  dealing  for  account  of 
any  clerk  or  subordinate  employee  of  any  bank,  trust  com- 
pany, insurance  company  or  other  inonied  corporation  or  bank  ; 
and  the  Exchange  promptly  adopted  the  recommendation  and 
amended  the  rule  accordingly. 

Another  recommendation  was  the  abolition  of  the  un- 
listed department  of  the  Exchange,  and  that  recom- 
mendation has  been  carried  out.  In  connection  with 
that  recommendation  the  suggestion  was  made  that  the 
Exchange  should  adopt  methods  to  compel  the 
filing  of  frequent  statements  of  the  financial  condition  of  the 
companies  whose  securities  are  listed,  including  balance  sheets 
and  income  and  expense  accounts,  which  should  be  open  to 
public  examination  under  proper  rules  and  regulations  ;  and 
that  in  future  applications  for  listing  the  consideration  for 
capital  stock  issued  should  be  stated.  As  to  these  latter 
suggestions  we  call  attention  to  the  requirements  for  listing 
from  which  we  have  quoted  at  considerable  length  above. 
Copies  of  applications  for  listing  are  given  to  the  press  and 
are  widely  disseminated,  and  all  documents  filed  by  applicants 
are  open  to  inspection  at  the  offices  of  the  Exchange.  To  require 
the  filing  with  the  Exchange  of  frequent  statements  scarcely 
seems  necessary  in  view  of  the  detailed  statements  that  are 
widely  published  and  distributed  to  stockholders  by  nearly  all 
the  companies  whose  securities  are  listed,  and  such  publications 
as  Poor's  Manual,  Moody 's  Manual  and  the  Financial  Chroni- 
cle, which  are  readily  accessible  in  brokers'  offices  and  else- 
where to  those  who  desire  the  information  that  such  state- 
ments would  furnish. 

The  report  recommended  the  enactment  of  a  statute  with 
respect  to  false  reports  of  transactions  made  by  brokers  to 
customers  which  the  Legislature  has  not  as  yet  adopted. 

A  valuable  recommendation  related  to  the  unit  in  trading. 
The  language  of  the  report  was  :  "  The  Exchange  should  in- 
sist that  all  trading  be  done  on  the  basis  of  a  reasonably 


10 

small  unit,  say  100  shares  of  stock  or  $1,000  of  bonds,  but 
should  not  permit  the  offers  of  such  lots  or  bids  for  such  lots 
to  be  ignored  by  traders  offering  or  bidding  for  larger 
amounts.  The  practice  now  permitted  by  allowing  bids  and 
offers  for  large  amounts,  all  or  none,  assists  the  manipulation 
of  prices."  The  Exchange  adopted  these  suggestions  in  an 
elaborate  system  of  rules  found  on  pages  76  et  seq.  of 
the  constitution.  The  scheme  of  these  rules  may  be 
shown  by  a  quotation  :  "If  a  bid  is  made  for  a  larger 
lot  of  stock  above  the  price  at  which  smaller  lots 
are  offered,  or  if  a  transaction  is  made  in  a  larger  lot  above 
the  price  in  which  smaller  lots  are  offered,  such  bidder  or 
buyer  shall  be  compelled  to  buy  any  or  all  of  the  smaller  lots 
which  were  publicly  offered  at  the  time  at  the  lower  price  up 
to  the  amount  of  the  bid  for  the  larger  lot."  This  system  of 
rules,  of  which  the  one  quoted  is  part,  is  drastic  and  of 
great  effect  in  preventing  manipulation  of  prices. 

The  report  recommended  that  the  clearing  sheets  sent  by 
members  to  the  Clearing  House  be  retained  instead  of  being 
returned  to  the  members  at  the  end  of  each  week.  The 
Exchange  considers  that  these  sheets  are  the  property  of 
its  members,  sent  in  to  the  Clearing  House  for  a  particular 
purpose,  and  that  the  owners  are  entitled  to  them  when  that 
purpose  has  been  accomplished.  The  sheets  are  only  tran- 
scripts from  the  members'  books,  which  are  permanent  records 
of  the  transactions.  For  these  reasons  it  has  not  adopted 
this  suggestion. 

A  further  recommendation  was  that  branch  offices  of 
brokers  should  be  abolished  or  effectively  regulated.  The  Ex- 
change has  not  as  yet  seen  its  way  clear  to  altogether  abolish 
them.  It  has,  however,  taken  firm  measures  for  the  effective 
regulation  of  such  offices  and  the  elimination  of  their  objec- 
tionable features. 

A  further  recommendation  was  that  a  statute  be  adopted 
making  misleading  advertisements  criminal,  but  the  Legis- 
lature has  not  yet  adopted  that  recommendation. 


11 


I. 

The  New  York  Stock  Exchange  is  not  con- 
cerned in  interstate  or  foreign  commerce,  nor 
do  its  operations  in  any  respect  come  within  the 
sphere  of  federal  jurisdiction. 

Hopkins  vs.  U.  S.t  171  U.  S.,  578  ;    and   Anderson 
vs.  U.  S.,  171  U.  S.,  604. 

(a)  The  first  of  these  cases  was  a  case  brought  by  the 
United  States  against  the  members  of  a  voluntary  unincorpo- 
rated association  known  as  The  Kansas  City  Live  Stock 
Exchange.  The  purpose  of  the  action  was  to  obtain  the 
dissolution  of  the  Exchange  and  to  perpetually  enjoin  the 
members  from  entering  into,  or  from  continuing  in, 
any  combination  of  a  like  character.  The  rules  of 
the  Exchange  prescribed  the  minimum  rates  to  be 
charged  by  its  members  for  selling  live  stock  ;  pro- 
hibited the  members  from  employing  any  agent  or 
solicitor  except  upon  a  stipulated  salary  not  contingent  on  the 
commission  earned ;  limited  the  number  of  solicitors  that 
might  be  employed ;  prohibited  the  members  from  sending 
prepaid  telegrams  or  telephone  messages  giving  current  quo- 
tations ;  and  also  provided  that  no  member  of  the  Exchange 
should  transact  business  with  any  person  violating  any  of  the 
rules  or  regulations  of  the  Exchange  or  with  an  expelled  or 
suspended  member.  It  appeared  that  substantially  all  the 
business  transacted  in  receiving,  buying,  selling  and  handling 
live  stock  at  Kansas  City  was  carried  on  by  the  members  of 
the  Exchange  as  commission  merchants,  and  that  great  quan- 
tities of  this  live  stock  was  shipped  from  other  states  and 
was  sold  at  the  stock  yards  to  various  packing  houses,  and  for 
shipment  to  other  states. 


12      . 

Mr.  Justice  PECKHAM,  in  delivering  the  opinion  of  the  court, 
said  : 

"  As  set  forth  in  the  record,  the  main  facts  are  that 
the  defendants  have  entered  into  a  voluntary  associa- 
tion for  the  purpose  of  thereby  the  better  conducting 
their  business,  and  that  after  they  entered  into  such 
association  they  still  continued  their  individual  business 
in  full  competition  with  each  other,  and  that  the  asso- 
ciation itself,  as  an  association,  does  no  business  what- 
ever, but  is  simply  a  means  by  and  through  which  the 
individual  members  who  have  become  thus  associated 
are  the  better  enabled  to  transact  their  business  ;  to 
maintain  and  uphold  a  proper  way  of  doing  it ;  and  to 
create  the  means  for  preserving  business  integrity  in 
the  transaction  of  the  business  itself.  The  business  of 
defendants  is  primarily  and  substantially  the  buying 
and  selling,  in  their  character  as  commission  merchants, 
at  the  stock  yards  in  Kansas  City,  live  stock  which  has 
been  consigned  to  some  of  them  for  the  purpose  of  sale, 
and  the  rendering  of  an  account  of  the  proceeds  arising 
therefrom.  The  sale  or  purchase  of  live  stock  as  com- 
mission merchants  at  Kansas  City  is  the  business  done, 
and  its  character  is  not  altered  because  the  larger  pro- 
portion of  the  purchases  and  sales  may  be  of  live  stock 
sent  into  the  State  from  other  States  or  from  the 
Territories.  *  *  * 

*  The  by-laws  of  the  exchange  relate  to  the 
business  of  its  members  who  are  commission  merchants 
at  Kansas  City,  and  some  of  these  by-laws,  it  is  claimed 
by  the  Government,  are  in  violation  of  the  act  of  Con- 
gress, because  they  are  in  restraint  of  that  business 
which  is  in  truth  interstate  commerce.  That  one  of 
the  by-laws  which  relates  to  the  commissions  to  be 
charged  for  selling  the  various  kinds  of  stock,  is  par- 
ticularly cited  as  a  violation  of  the  act.  *  *  * 
The  commission  agent  in  selling  the  cattle  for  their 
owner  simply  aids  him  in  finding  a  market  ;  but  the 
facilities  thus  afforded  the  owner  by  the  agent  are  not 
of  such  a  nature  as  to  thereby  make  that  agent  an  indi- 
vidual engaged  in  interstate  commerce,  nor  is  his  agree- 


13 

inent  with  others  engaged  ID  the  same  business, 
as  to  the  terms  upon  which  they  would  provide 
these  facilities,  rendered  void  as  a  con- 
tract in  restraint  of  that  commerce.  *  *  * 

*  *     *     If  charges  of  the  nature  described  do  not 
amount  to  a  regulation  of  interstate  trade  or  commerce, 
*     *     *     it  would   for  a   like   reason   seem   clear   that 
agreements   relating   to   the   amounts  of  such    charges 
among  those  who  furnish  the  privileges  or  facilities  are 
not  in  restraint  of  that  kind  of  trade.     *     *     * 

*  *     *     The  services  of  members  of  different  stock 
and   produce    exchanges    throughout   the   country,    in 
effecting  sales  of  the  articles  they  deal  in,   are  of  a  simi- 
lar nature.     Members  of  the  New  York  Stock  Exchange 
buy  and  sell  shares  of  stock  of  railroads  and  other  cor- 
porations, and  the  property  represented  by  such  shares 
of  stock   is   situated   all  over  the  country.     Is  a  broker 
whose  principal  lives  outside  of   New  York   State,   and 
who   sends  him  the   shares  of  stock   or   the   bonds  of  a 
corporation  created  and  doing  business  in  another  State, 
for  sale,  engaged  in  interstate  commerce  ?     If  he  is  em- 
ployed to  purchase  stock  or  bonds  in  a  like  corporation 
under  the  same  circumstances,  is  he  then  engaged  in  the 
business  of  interstate  commerce  ?     It  may,  perhaps,  be 
answered  that  stocks  or  bonds  are  not  commodities,  and 
that   dealers    therein    are   not   engaged   in   commerce. 
Whether  it  is  an  answer  to  the   question   need   not   be 
considered,  for  we  will  take  the  case  of  the  New  York 
Produce   Exchange.     Is   a   member   of    that    body   to 
whom   a   cargo    of   grain   is  consigned  from  a  western 
State  to  be  sold  engaged  in  interstate   commerce   when 
he   performs  the  service  of   selling  the  article  upon  its 
arrival  in  New  York  and  transmitting  the   proceeds   of 
the  sale  less  his  commission  ?     Is  a  New  Orleans  cotton 
broker  who  is  a  member  of  the  Cotton  Exchange  of  that 
city,  and  who  receives  consignments  of  cotton  from  dif- 
ferent States  and  sells  them  on  'change  in  New  Orleans 
and  accounts  to  his  consignors  for  the  proceeds  of  such 
sales  less  his  commission,  engaged   in   interstate   com- 
merce ?     Is   the   character   of   the   business   altered  in 


14 

either  case  by  the  fact  that  the  broker  has  ad- 
vanced moneys  to  the  owner  of  the  article  and 
taken  a  mortgage  thereon  as  his  security?  We 
understand  we  are  in  these  queries  assuming  sub- 
stantially the  same  facts  as  those  which  are  con- 
tained in  the  case  before  us,  and  if  these  defendants 
are  engaged  in  interstate  commerce  because  of  their 
services  in  the  sale  of  cattle  which  may  come  from 
other  States,  then  the  same  must  be  said  in  regard  to 
the  members  of  the  other  exchanges  above  referred  to. 
We  think  it  would  be  an  entirely  novel  view  of  the 
situation  if  all  the  members  of  these  different  exchanges 
throughout  the  country  were  to  be  regarded  as  engaged 
in  interstate  commerce,  because  they  sell  things  for  their 
principals  which  come  from  States  different  from  the 
one  in  which  the  exchange  is  situated  and  the  sale 
made. 

"  The  theory  upon  which  we  think  the  by-law  or 
agreement  regarding  commissions  is  not  a  violation  of 
the  statute  operates  also  in  the  case  of  the  other  pro- 
visions of  the  by-laws.  The  answer  in  regard  to  all 
objections  is,  the  defendants  are  not  engaged  in  inter- 
state commerce." 

Anderson  vs.  United  States,  171  U.  8.,  604,  was  another 
case  brought  by  the  United  States  under  the  Sherman  Act, 
the  purpose  of  the  action  being  the  dissolution  of  the  .Traders' 
Live  Stock  Exchange,  an  unincorporated  association.  The 
members  of  the  Exchange  were  not  commission  merchants 
as  in  the  Hopkins  case, '  but  traders.  The  rules  of  the 
exchange  provided  that  it  would  not  recognize  any  yard 
trader  unless  he  was  a  member  of  the  Exchange  ;  that  two  or 
more  parties  trading  together  as  partners  must  both  be  mem- 
bers of  the  Exchange  ;  that  no  member  of  the  Exchange  should 
employ  any  person  to  buy  or  sell  cattle  unless  such  person 
held  a  certificate  of  membership  in  the  Exchange ;  and  that  no 
member  of  the  Exchange  should  be  allowed  to  pay  any  other 
buyer  or  salesman  any  sum  of  money  as  a  fee  for  buying 


15 

cattle  from,  or  selling  to,  a  party  not  a  member  of  the 
Exchange.  Mr.  Justice  PECKHAM  in  delivering  the  opinion  of 
the  Supreme  Court  said  : 

"  In  the  view  we  take  of  this  case  we  are  not  called 
upon  to  decide  whether  the  defendants  are  or  are  not 
engaged  in  interstate  commerce,  because  if  it  be  con- 
ceded they  are  so  engaged,  the  agreement  as  evidenced 
by  the  by-laws  is  not  one  in  restraint  of  that  trade,  nor 
is  there  any  combination  to  monopolize  or  attempt  to 

monopolize  such  trade  within  the  meaning  of  the  act. 
»     #     * 

"  From  very  early  times  it  has  been  the  custom  for 
men  engaged  in  the  occupation  of  buying  and  selling 
articles  of  a  similar  nature  at  any  particular  place  to 
associate  themselves  together.  The  object  of  the  asso- 
ciation has  in  many  cases  been  to  provide  for  the  ready 
transaction  of  the  business  of  the  associates  by  obtain- 
ing a  general  headquarters  for  its  conduct,  and  thus  to 
ensure  a  quick  and  certain  market  for  the  sale  or 
purchase  of  the  article  dealt  in.  Another  purpose 
has  been  to  provide  a  standard  of  business  integ- 
rity among  the  members  by  adopting  rules  for  just 
and  fair  dealing  among  them  and  enforcing  the 
same  by  penalties  for  their  violation.  The  agree- 
ments have  been  voluntary,  and  the  penalties  have 
been  enforced  under  the  supervision  and  by  mem- 
bers of  the  association.  The  preamble  adopted  by  the 
association  in  this  case  shows  the  ostensible  purpose 
of  its  formation.  It  was  not  formed  for  pecuniary 
profits,  and  a  careful  perusal  of  the  whole  agreement 
fails,  as  we  think,  to  show  that  its  purpose  was  other 
than  as  stated  in  the  preamble.  In  other  words,  we 
think  that  the  rules  adopted  do  not  contradict  the 
expressed  purpose  of  the  preamble,  and  that  the  result 
naturally  to  be  expected  from  an  enforcement  of  the 
rules  would  not  directly,  if  at  all,  affect  interstate  trade 
and  commerce."  *  *  * 

In  Ware   <&   Ldand  vs.  Mobile   County,  209  U.  S.,  405,  it 
was  held  that  contracts  for  sales  of  cotton  for  future  delivery, 


10 

which  do  not  obligate  interstate  shipments,  were  not  subjects 
of  interstate  commerce,  and  that  brokers  in  Mobile  taking 
orders  for  the  purchase  and  sale  of  cotton  for  future  delivery 
to  be  executed  upon  the  New  York  and  New  Orleans  Cotton 
Exchanges  were  not  engaged  in  interstate  commerce. 

In  New  York,  ex  rel.  Hatch  vs.  Eeardon,  204  U.  8.,  152, 
the  Supreme  Court  passed  upon  the  question  whether  the 
Stock  Transfer  Tax  of  New  York  was  or  was  not  a  burden 
upon  interstate  commerce.  Speaking  of  a  sale  made  in  the 
State  of  New  York  of  stock  in  the  Southern  Railway  Company 
and  of  stock  in  the  Chicago,  Milwaukee  and  St.  Paul  Railroad 
Company,  the  Court  said :  "There  is  not  a  shadow  of  a  ground  " 
for  calling  these  transactions  interstate  commerce  (page  161). 

( b)  It  follows  from  these  cases  that  Congress  has  no  power 
with  respect  to  the  matters  affecting   directly  or  remotely  the 
Exchange   concerning   which   testimony  was  elicited  ;  for  in- 
stance as  to  whether  such   a   body  as  the   Exchange    should 
be    incorporated ;    the   number    of    its   members ;    the    mini- 
mum  rate   of    commission ;   the    rules   governing   the   mem- 
bers  and  their  transactions   on   the  Exchange ;  the  exercise 
of  its    disciplinary   powers   over    members ;    the    listing    of 
securities  and  the    striking  of   securities  from  the  list ;  mar- 
ginal purchases;  manipulation,  and   short   sales.      All  these 
matters   are   clearly  beyond   the   province  and  jurisdiction  of 
Congress. 

(c)  The  agreement  between  the  Exchange  and  the  Western 
Union     Telegraph    Company,    under    which    the     Telegraph 
Company  may   not    deliver   quotations   to    members   of   the 
Exchange    at   their    offices    south   of  Chambers    Street,   but 
may   deliver    such  quotations    to    members   in   the   City   of 
New    York    north   of    Chambers    Street,    and    to    any   non- 
members   of   the  Exchange  in  the  City  of  New  York  if  ap- 
proved by  the  Exchange,  and  to  persons  outside  the  City  of 
New   York   provided   they   are   not    engaged    in    conducting 
bucket   shops,  is   not  an  arrangement  that  restrains   interstate 


17 

commerce  or  any  other  soit  of  commerce.  The  Exchange,  as 
the  owner  of  quotations,  prescribes  the  persons  to  whom  the 
public  service  corporation  transmitting  the  quotations  may 
deliver  them.  The  right  exercised  by  the  Exchange  is  similar 
to  the  right  exercised  by  every  one  who  sends  a  telegraph 
message. 

In  Board  of  Trade  vs.  Christie  Grain  and  Stock  Company, 
198  U.  S.,  236,  the  Chicago  Board  of  Trade  ,  sought  success- 
fully to  enjoin  certain  of  the  defendants  from  obtaining  and 
using  its  quotations.  The  plaintiff's  quotations  were  fur- 
nished to  a  Telegraph  Company  under  an  arrangement  very 
similar  to  the  arrangement  between  the  Exchange  and  the 
Western  Union  Telegraph  Company,  the  Telegraph  Company 
agreeing  not  to  furnish  them  to  any  bucket  shop  or  place 
where  they  might  be  used  as  a  basis  for  bets  or  illegal  con- 
tracts. The  Supreme  Court  said  as  to  the  claim  that  this 
arrangement  was  in  restraint  of  trade  (page  252)  :  "  But  so 
far  as  these  contracts  limit  the  communication  of  what  the 
plaintiff  might  have  refrained  from  communicating  to  any  one, 
there  is  no  monopoly  or  atfempt  at  monopoly,  and  no  contract 
in  restraint  of  trade,  either  under  the  statute  or  at  common 
law." 

In  the  case  of  the  Commercial  Telegram  Company  vs. 
Smith,  Jt-7  Hun,  4,94,  the  claim  was  made  that  the  Stock 
Exchange  had  no  right  to  exclude  the  Commercial  Telegram 
Company  from  the  privilege  of  collecting  quotations  on  its 
floor  for  transmission  to  outsiders.  This  was  held  to  be 
erroneous.  Mr.  Justice  VAN  BRUNT,  writing  the  opinion  of 
the  Court,  said  (pages  505  and  507)  : 

"  The  claim  that  the  Stock  Exchange  has  no  right 
to  exclude  the  Commercial  Telegram  Company  from  its 
floor  upon  the  ground  of  public  policy  evidently  pro- 
ceeds upon  an  entirely  erroneous  theory.  The  Exchange 
is  a  private  association  ;  it  has  the  right  to  admit  to  its 


18 

floor  whom  it  pleases  ;  it  obtains  nothing  from  the 
State  except  that  protection  which  the  law  affords  to 
every  citizen  ;  it  has  sought  no  special  privilege  and 
obtained  no  special  powers.  It  is,  therefore,  just  as 
much  the  master  of  its  own  business  and  of  the  method 
of  conducting  the  same  as  any  private  individual 
within  the  State.  It  may  make  public  the  trans- 
actions which  occur  within  its  walls  or  it 
may  refuse  all  information  in  respect  theroto. 
No  matter  which  course  is  pursued,  so  long  as  it  violates 
no  law  it  has  a  right  to  conduct  its  business  as  it 
pleases.  *  *  *  The  New  York  Stock  Exchange  has 
asked  nothing  from  the  people  of  the  State,  except  that 
which  is  granted  to  every  citizen ;  it  has  no  special 
privileges  under  the  law,  it  has  no  special  rights,  and 
the  people  therefore  have  no  right  to  interfere  in  the 
transaction  of  its  business  to  any  greater  extent  than 
they  have  in  that  of  any  individual." 

In  Wilson,  as  President  of  the  Consolidated  Exchange, 
against  Smith,  18  N.  Y.  State  Rep.,  78,  Mr.  Justice  BROWN 
said  at  pp.  84,  85  : 

"  The  New  York  Stock  Exchange  is  not  a  corpora- 
tion ;  it  is  a  voluntary  association  of  individuals  en- 
gaged in  business  as  brokers  in  stocks,  bonds  and  other 
securities. 

"  It  is  not  the  outgrowth  of  any  public  demand, 
serves  no  public  interest,  has  sought  no  special  privi- 
leges or  power,  and  has  asked  and  obtained  nothing 
from  the  State,  except  that  protection  which  the  law 
affords  every  citizen  and  exists  solely  for  the  purpose 
of  affording  its  members  facilities  for  the  transaction 
of  their  individual  business.  *  *  * 

"  111  the  exercise  of  its  ordinary  functions  it  does 
not  usually  engage  in  auy  business  except  such  as  are 
incidental  to  the  furnishing  proper  and  convenient 
facilities  to  its  members.  It  is  not  interested  in  the 
business  transacted  between  its  members,  and  makes 
no  sales  or  purchases  of  any  securities  dealt  in  within 
its  walls,  and  is  under  no  obligation  to  acquire  any  in- 


19 

formation  as  to  any  transactions  taking  place  there,  or 
to  ascertain  the  prices  of  any  securities  therein  bought 
or  sold. 

"  In  all  this,  there  is  plainly  no  public  service,  and 
in  accomplishing  the  object  and  purpose  of  its  organi- 
zation no  public  duty.  *  *  So  that  in  all  business 
transactions  on  the  floor  of  the  Exchange,  between  its 
members  there  is  no  public  service  and  no  public  duty, 
and  no  obligation  rests  upon  any  of  the  members  of  the 
Exchange  to  make  known  any  of  the  details  of  their  trans- 
actions with  other  members,  and  that  with  respect  to 
sales  of  bonds,  stock  and  securities  there  is  the  same 
immunity  from  public  inspection  as  exists  in  all 
branches  of  mercantile  business.  *  *  * 

"  The  Exchange,  as  an  association,  stands  in  no  dif- 
ferent relation  to  the  public  in  respect  to  their  trans- 
actions than  do  individual  members.  Whatever  it  does, 
it  does  by  their  direction.  Its  acts  express  simply  the 
will  of  the  majority.  If  there  is  any  public  duty 
growing  out  of  the  business  of  dealing  in  stocks  and 
bonds,  the  obligation  is  greater  upon  the  broker  who 
sells  than  on  the  Exchange.  The  Exchange  is  but  the 
agent  of  its  members.  Whatever  information  it  pos- 
sesses it  holds  in  trust  for  its  members.  Yet  any 
member  may  refuse  to  make  public  his  sales  or  pur- 
chases. How  then  can  the  Exchange  be  compelled  to 
make  public  that  member's  business  which  he  has  a 
right  to  keep  private  ?  *  *  *  (p.  87). 

"  So  long  as  he  violates  no  law  and  does  not  inter- 
fere with  the  reciprocal  rights  of  others,  every  man 
may  do  what  he  will  with  his  own  ;  he  may  engage  in 
any  lawful  business  or  occupation  and  he  may  sell  his 
own  goods  or  refuse  to  sell  to  whomsoever  he  chooses. 
The  obligation  of  the  stock  exchange  with  reference  to 
the  transactions  between  its  members,  arising  from  the 
fact  that  it  collects  and  sells  the  quotations,  can  be  no 
greater  than  the  obligations  resting  on  any  other  mer- 
chant to  make  known  the  price  of  his  goods." 

(d)  The  provisions  of  the  constitution  of   the  Exchange  to 
the  effect  that  the  proceeds  of  the  transfer   of   a   membership 


20 

shall  be  applied  first  to  the  payment  of  debts  due  to 
fellow  members  are  not  in  conflict  with  the  provisions  or 
policy  of  the  Bankruptcy  Acts.  Hyde  vs.  Woods,  94  U.  S., 
5%3,  dealt  with  the  provisions  of  the  constitution  of  the  San 
Francisco  Stock  and  Exchange  Board,  a  voluntary  associa- 
tion. The  constitution  of  the  Board  provided  that  "  in  sales  of 
seats  for  account  of  delinquent  members  the  proceeds  shall 
be  applied  to  the  benefit  of  the  members  of  this  board  ex- 
clusive of  outside  creditors,  unless  there  shall  be  a  balance 
after  payment  of  the  claims  of  members  in  full."  The  Su- 
preme Court  said  with  respect  to  article  15,  page  525  : 

"  There  is  no  reason  why  the  stock  board  should 
not  make  membership  subject  to  the  rule  in  question, 
unless  it  be  that  it  is  a  violation  of  some  statute,  or  of 
some  principle  of  public  policy.  It  does  not  violate 
the  provision  of  the  bankrupt  law  against  preference  of 
creditors,  for  such  a  preference  is  only  void  when  made 
within  four  months  previous  to  the  commencement  of 
the  bankrupt  proceedings.  •  Neither  the  bankrupt 
law  nor  any  principle  of  morals  is  violated  by  this 
provision,  so  far  as  we  can  see.  A  seat  in  this 
board  is  not  a  matter  of  absolute  purchase.  Though 
we  have  said  it  is  property,  it  is  incum- 
bered  with  conditions  when  purchased,  without 
which  it  could  not  be  obtained.  It  never  was  free 
from  the  conditions  of  article  15,  neither  when  Fenn 
bought,  nor  at  any  time  before  or  since.  That  rule  en- 
tered into  and  became  an  incident  of  the  property  when 
it  was  created,  and  remains  a  part  of  it  into  whose 
hands  soever  it  may  come.  As  the  creators  of  this 
right— this  property— took  nothing  from  any  man's 
creditors  when  they  created  it,  no  wrong  was  done  to 
any  creditor  by  the  imposition  of  this  condition."  *  *  * 

"  It  is  said  that  it  is  against  the  policy  of  the  bank- 
rupt law,  against  public  policy,  to  permit  a  man  to  make 
in  this  or  any  other  manner  a  standing  or  perpetual  ap- 
propriation of  his  property  to  the  prejudice  of  his  gen- 
eral creditors  ;  and  that  it  is  to  this  point  that  the  nu- 


21 

merous  authorities  of  counsel  are  cited.  They  all,  how- 
ever, relate  to  cases  where  a  man  has  done  this  with 
property  which  was  his  own, — property  on  which  he 
himself  imposed  the  direction,  or  the  incumbrance, 
which  impeded  creditors. 

"  It  is  quite  different  where  a  man  takes  property  by 
purchase  or  otherwise,  which  is  subject  to  that  di- 
rection or  disposition  when  he  receives  it.  It  is  no  act 
of  his  which  imposes  the  burden.  It  was  imposed  by 
those  who  had  a  right  to  do  it,  and  to  make  it  an  ac- 
companiment of  any  title  which  they  gave  to  it." 


II. 

The  organization  and  constitution  of  the  Ex- 
change are  admirably  adapted  to  facilitate  the 
convenient  transaction  of  the  business  of  its 
members,  to  prevent  wrong,  and  to  maintain 
high  standards  of  commercial  honor  and  integ- 
rity. 

The  constitution  declares  that  the  object  of  the  Exchange 
"  shall  be  to  furnish  exchange  rooms  and  other  facilities  for  the 
convenient  transaction  of  their  business  by  its  members,  as 
brokers ;  to  maintain  high  standards  of  commercial  honor  and 
integrity  among  its  members ;  and  to  promote  and  inculcate 
just  and  equitable  principles  of  trade  and  business." 

The  Governing  Committee  has  always  been  composed  of  men 
of  experience  and  high  standing.  It  consists  of  forty  mem- 
bers, ten  of  whom  are  elected  every  year.  The  re-election  of 
its  members  has  been  the  rule,  to  retain  the  benefits  of  their 
knowledge  and  experience  and  assure  courage  and  continuity 
in  the  policies  of  the  management.  A  more  stable  and  efficient 
form  of  government  could  not  be  devised. 


22 

Article  XVII.,  Sec.  2,  provides  that  "  a  member  adjudged 
*  *  *  to  be  guilty  of  fraud  or  of  fraudulent  acts  shall  be 
expelled."  Sec.  6  of  the  same  Article  provides  that  "  a  mem- 
ber who  shall  be  adjudged  *  *  *  guilty  *  *  of 
any  conduct  or  proceeding  inconsistent  with  just  and  equitable 
principles  of  trade  may  be  suspended  or  expelled  ; "  Sec.  7, 
that  a  member  may  be  required  to  submit  to  the  Governing 
Committee  or  to  any  Standing  Committee  such  portion  of  his 
books  or  papers  as  are  material  to  any  matter  under  investi- 
gation ;  and  Sec.  8,  that  a  member  may  be  suspended  for  any 
act  determined  to  be  contrary  to  the  interests  or  welfare  of 
the  Exchange. 

Puts  and  calls  are  prohibited  (page  48). 

Fictitious  transactions  are  forbidden  ;  (page  48)  and  this 
prohibition  includes  "  matched  "  orders  and  "  wash  "  sales. 

Resolutions  of  March  30,  1910  (pages  76  to  79),  provide 
that  "  all  bids  and  offers  on  larger  lots  shall  be  considered  to 
be  for  any  part  thereof  in  lots  of  100  shares  or  of  multiples 
thereof  ",  so  that  any  man  who  offers  to  buy  or  sell  a  larger 
block  of  stock  must  take  and  pay  for,  or  must  sell  and  deliver, 
smaller  blocks  which  are  offered  at  lower  prices  or  bid  for  at 
higher  prices. 

By  Article  XL,  Sec.  1,  provision  is  made  for  the  arbitra- 
tion of  disputes  between  members  ;  by  Article  XXX  for 
immediate  settlement  of  disagreements  over  the  terms  of  a  con- 
tract ;  and  by  Article  XL,  Section  1,  Par.  10  for  the  determina- 
tion of  questions  arising  upon  the  settlement  of  contracts, 
and  practically  for  the  prompt  disposition  of  every  question 
which  might  embarrass  the  expeditious  transaction  of  busi- 
ness. 

Any  member  who  fails  to  comply  with  his  contracts,  or  is 
insolvent,  is  at  once  automatically  suspended.  (Article  XVI.) 

Members  are  forbidden  to  take  or  carry  speculative  ac- 
counts in  which  a  clerk  of  the  Exchange,  or  of  a  member  of 
the  Exchange,  or  of  a  bank,  trust  company,  banker  or  insur- 


23 

ance  company,  is  directly  or  indirectly  interested,  unless  the 
written  consent  of  the  employer  has  been  first  obtained,  (page 
84) 

Every  member  of  the  Exchange  is  required  to  use  due 
diligence  to  learn  the  essential  facts  relating  to  every  account 
accepted  by  himself,  or  by  his  clerks  or  representatives,  (page 
84) 

If  any  customer  of  a  member  chooses  to  bring  before  the 
Arbitration  Committee  a  claim  against  a  member,  the  member 
is  bound  by  the  award  of  that  Committee.  Any  complaint  of 
alleged  wrongdoing  asserted  by  a  non- member  against  a 
member  of  the  Exchange  is  promptly  dealt  with  by  the  appro- 
priate Committee. 

These  are  only  a  few  among  the  body  of  rules  which  has 
been  established  as  the  result  of  long  experience  and  serious 
thought.  We  believe  that  no  better  system  of  rules  could 
have  been  devised.  They  are  a  growth,  and  reflect  the  best 
efforts  of  the  Governors  to  accomplish  the  objects  of  the  Ex- 
change as  expressed  in  its  constitution  with  due  regard  to 
changing  conditions.  They  regulate  a  business  of  vast 
dimensions  and  great  complexity ;  and  that  they  should  not 
obstruct  it  in  any  of  its  legitimate  phases  is  the  essential  thing. 
They  may  not  prevent  some  sporadic  transactions  and  opera- 
tions that  cannot  be  justified  ;  but  no  system  of  rules  can  be 
devised  that  will  do  so.  The  most  that  can  be  expected  is,  that 
they  go  as  far  in  that  direction  as  is  consistent  with  the  free 
and  unobstructed  transaction  of  legitimate  business. 

The  rules  making  acts  contrary  to  just  and  equitable  prin- 
ciples of  trade  a  ground  for  expulsion  enable  the  Exchange  to 
hold  its  members  to  a  standard  of  business  integrity  far  higher 
than  the  law  does,  or  could,  require.  A  member  may  be  ex- 
pelled for  doing  that  which,  according  to  the  standard  of  the 
most  honorable  of  his  own  business  associates,  is  deemed 
contrary  to  fair  dealing,  irrespective  of  the  question  whether 
or  not  it  amounts  at  law  to  fraud  or  positive  wrongdoing. 


24 

He  may  be  punished  for  reckless  and  unbusinesslike  conduct, 
and  even  for  errors  of  judgment.  In  all  his  transactions 
he  has  to  conform  to  a  standard  which  the  law  does  not 
undertake  to  prescribe.  Whatever  he  does  has  to 
be  in  accordance  with  "  just  and  equitable  principles  of 
trade  " — a  standard  unknown  to  any  system  o'f  law.  Whether 
any  particular  act  of  his  violates  those  principles  is  deter- 
mined, not  by  an  outside  body  of  laymen  like  a  jury  and 
the  application  of  technical  rules  of  evidence  ;  but  by  a  select 
body  of  members  of  the  Exchange,  chosen  to  uphold  just  and 
fair  dealing,  who  ascertain  the  facts  with  businesslike  directness, 
and  who  are  empowered  to  expel,  which  is  the  ruin  of  a  man's 
career  as  a  broker,  or  to  suspend,  which  is  a  deep  humiliation. 
These  rules  are  an  illustration  of  the  disciplinary  efficiency  of 
the  Exchange. 

The  rules  requiring  the  completion  of  any  sale  and  pur- 
chase on  the  Exchange  by  actual  delivery  and  paj^ment  on  the 
day  after  the  transaction,  and  prohibiting  fictitious  transac- 
tions, "  matched  "  orders  and  "  wash  "  sales,  are  illustrations 
of  the  provisions  made  to  assure  that  every  purchase  and  sale 
shall  be  a  real  and  genuine  transaction.  Many  think  that  that 
is  as  far  as  rules  can  go  in  fixing  the  regularity  of  purchases  and 
sales.  The  region  beyond  is  the  region  of  the  motives  of  men, 
and  how  far  regulation  can  extend  into  that  region,  if  at  all, 
without  obstructing  legitimate  business,  is  one  of  the  most 
difficult  of  problems.  But  the  efficacy  of  the  existing  rules, 
providing  that  every  transaction  shall  be  a  real  and  genuine 
purchase  and  sale,  in  assuring  the  legitimacy  of  the  great  bulk 
of  the  business  transacted  on  the  Exchange  is  unquestionable. 

In  the  conduct  of  this  mass  of  business  there  is  seldom 
a  dispute  between  the  contracting  parties  which  is  not  im- 
mediately settled  through  the  instrumentalities  of  the  Ex- 
change without  resort  to  litigation.  There  is  no  business 
community  in  which  the  obligations  of  good  faith  and  fair 
dealing  are  observed  more  strictly  than  by  the  members  of  the 


25 

Exchange.  This  is  proverbial.  The  repudiation  of  a  contract 
is  practically  unknown.  Every  day  thousands  of  transactions 
involving  millions  of  money  are  closed  without  a  hitch.  That 
anything  else  could  happen  on  the  Exchange  is  almost  incon- 
ceivable to  its  members.  A  body  which  has  developed  such  a 
high  sense  of  honor  among  its  members  must  be  sound  in  its 
principles  and  administration. 

The  fidelity  of  the  members  of  the  Exchange  to  their  cus- 
tomers is  attested  by  the  fact  that,  notwithstanding  the  unusual 
risks  and  temptations  of  the  business,  only  seventy-eight 
failures  have  occurred  in  the  last  thirteen  years,  or  six  a  year. 
Thus  the  annual  ratio  of  members  who  failed  during  that 
period  to  the  total  membership  was  slightly  more  than  one- 
half  of  one  per  cent.  ;  and  half  of  those  who  failed  settled 
with  their  creditors.  It  seems  scarcely  probable  that  any 
rules  could  be  devised  to  produce  a  better  showing. 

Without  further  argument  or  illustration  we  feel  that  we  are 
thoroughly  justified  in  asserting  that  the  constitution,  govern- 
ment and  administration  of  the  Exchange  are  sound  and 
efficient.  They  are  not  perfect ;  no  human  things  are.  They 
may  be  criticised,  which  is  also  the  fate  of  all  things  human. 
That  they  should  be  denounced  is  intolerably  unfair  and 
unjust.  We  can  only  assume  that  there  is  room  for  improve- 
ment ;  but  that  is  a  work  to  be  undertaken  calmly  and  delib- 
erately, and  with  a  full  appreciation  of  the  fact  that  great 
interests  are  at  stake  which  will  not  bear  rough  or  arbitrary 
treatment,  and  of  the  fact  that  capable,  experienced  and  high- 
minded  men  have  been  long  at  work  on  what  problems  there 
are  seeking  to  solve  them  wisely  and  sanely.  Any  other 
process  of  change  and  improvement  is  fraught  with  grave 
dangers.  It  is  too  often  the  case  with  legislative  remedies, 
originating  in  excitement  and  agitation,  that  they  produce 
just  the  opposite  effect  to  what  was  expected  and  make  things 
worse  tfian  they  were.  The  history  of  legislation  more  than 
bears  out  the  truth  of  this  statement. 


26 


III. 

No  good  purpose  would  be  accomplished  by 
the  incorporation  of  the  Exchange.  On  the 
contrary,  the  substitution  of  public  control  for 
the  control  exercised  by  the  Exchange  over 
its  members  would  be  detrimental  to  the  public 
interest.  To  force  incorporation  would  be 
unjust. 

We  beg  to  refer  the  Committee  to  the  portions  of  the 
report  of  the  Hughes  Commission  and  of  the  statement  of  the 
officials  of  the  Exchange  submitted  to  the  Commission  that 
bear  on  that  subject. 

(1)  The  principal  argument  for  incorporation  is  that  a 
business  of  the  volume  and  public  importance  of  the  business 
transacted  upon  the  Exchange  should  be  subject  to  public 
regulation  and  control  ;  that  incorporation  would  involve  such 
public  regulation  and  control ;  and  that  thereby  certain  evils 
supposed  to  result  from,  or  to  be  incidental  to,  dealings  in 
stocks  on  the  Exchange  would  be  prevented  or  diminished. 

Let  us  analyze  these  propositions.  It  is  easy  to  talk  about 
incorporation  and  what  it  would  accomplish  ;  about  public 
regulation  and  its  virtues  ;  but  what  is  incorporation  and  what 
is  public  regulation  ?  what  agencies  do  they  bring  into  play  to 
supplant  those  now  in  force?  what  is  gained  or  lost  ?  A  calm 
consideration  of  these  questions  is  necessary  if  they  are  to  be 
settled  on  their  merits  rather  than  by  mere  clamour. 

(1)  What  is  incorporation  ? 

The  Exchange  is  now  a  voluntary  association  of  men  en- 
gaged in  the  business  of  buying  and  selling  stocks  and  other 
securities  on  their  own  account  and  as  brokers  for  others,  and 
who  deal  with  each  other.  They  formed  this  association 
as  a  convenience  for  themselves  in  dealing  with  eacli  other. 
They  admit  to  it  whom  they  see  fit  and  deem  proper  associ- 


ates.  No  one  has  a  right  to  be  admitted  any  more  than 
a  man  has  a  right  to  force  himself  into  an  ordinary  part- 
nership. It  is  rather  a  startling  proposition  that  such  a 
body  can  be  coerced  into  turning  itself  into  a  corpora- 
tion, if  anything  can  be  startling  in  these  days  when  the 
average  man  devotes  such  time  as  he  can  spare  from 
denouncing  the  shortcomings  of  public  authorities  to 
urging  the  extension  of  their  powers  and  activities. 
But  let  us  suppose  that  it  can  be  done.  What  follows  ? 
The  Cotton  Exchange  and  the  Produce  Exchange  are 
incorporated.  The  public,  however,  exercises  no  control  over 
the  business  conducted  upon  these  Exchanges  ;  and  as  such  they 
are  substantially  as  free  from  public  regulation  as  the  Stock 
Exchange,  or  as  the  Consolidated  Exchange,  which  is  also  unin- 
corporated. Their  charters  define  the  purposes  for  which  they 
are  incorporated  and  the  powers  they  may  exercise  for  the 
accomplishment  of  those  purposes.  So  long  as  they  do  not 
exceed  the  powers  which  their  charters  confer  upon  them 
they  are  the  sole  judges  of  the  manner  in  which  these  powers 
shall  be  exercised  ;  and  their  acts  done  in  the  exercise  of  these 
powers  are  not  subject  to  review  by  the  courts  or  by  any  other 
public  authority.  (People  ex  rel.  Johnson  vs.  Neio  York  Produce 
Exchange,  149  New  York,  401 ;  Haebler  vs.  New  York  Produce 
Exchange,  149  New  York,  414). 

Hence  incorporation  of  the  same  kind  as  the  Cotton  and 
Produce  Exchanges  would  accomplish  nothing  so  far  as  public 
regulation  is  concerned.  Let  us  pursue  this  a  little  further. 

Following  the  precedent  of  the  incorporated  Exchanges 
mentioned  the  charter  of  the  Stock  Exchange  would  declare  its 
purposes  and  invest  it  with  the  powers  necessary  to  carry  them 
out.  Among  these  powers  would  be  the  power  to  make  by-laws 
governing  the  transaction  of  business  on  the  Exchange,  and  the 
power  to  discipline  its  members  for  conduct  in  violation  of  the 
rules  or  the  law.  It  would  be  the  discretion  of  the  Exchange 
that  would  govern  in  the  exercise  of  these  powers,  and  no 


28 

court  or  public  official  could  interfere  with  the  exercise  of  that 
discretion  unless  a  power  was  abused  or  trangressed.  No  new 
power  of  direction,  control  and  government  would  be  intro- 
duced by  incorporation  on  this  model,  which  is  the  model  of 
tbe  law  as  it  exists  to-day.  Evidently  then  something  more  is 
intended  by  the  advocates  of  further  control  or  regulation. 

(2)  What  then  is  public  control  or  regulation  and  what 
does  it  involve  ? 

(a)  It  may  be  assumed  that  one  element  is  that  the 
Legislature  will  take  a  hand  in  framing  the  rules  for  the 
conduct  of  the  business,  and  particularly  in  prohibiting 
specific  acts  and  practices,  such  as,  for  instance,  improper 
manipulation. 

But  incorporation  is  not  necessary  to  the  enactment  and 
enforcement  of  such  prohibitions.  Members  of  the  Exchange 
are  just  as  amenable  to  the  laws  of  the  land  as  other 
persons,  and  a  prohibited  act  is  just  as  unlawful  on  the 
Exchange  as  anywhere  else.  If,  for  instance,  the  Legislature 
succeeds  in  defining  improper  manipulation,  and  enacts  a  law- 
prohibiting  it,  that  law  is  just  as  applicable  to  transactions  on 
the  Exchange  as  a  voluntary  association  as  it  could  be  if  it 
were  incorporated.  Incorporation  is  not  necessary  to  make 
such  a  law,  or  any  other  general  law,  applicable  to  transactions 
on  the  Exchange.  Hence  the  necessity  of  regulation  which 
can  be  accomplished  by  such  general  laws  is  not  an  argument 
for  incorporation.  There  are  such  general  laws  in  force,  and 
no  one  ever  dreamed  that  they  were  not  applicable  to  trans- 
actions on  the  Exchange  because  it  was  not  incorporated. 

As  to  framing  the  delicate  and  intricate  rules  for  the  con- 
duct of  the  business  on  the  Exchange,  which  is  the  fittest  body, 
—a  legislature  changing  from  year  to  year,  or  the  Governing 
Committee  of  the  Exchange,  composed  of  men  having  an  in- 
timate knowledge  of  the  business,  selected  for  their  ability, 
experience  and  character,  and  deeply  interested  in  its  orderly 


29 

conduct  and  the  reputation  of  the  Exchange?  That  question 
answers  itself. 

(b)  We  assume  that  another  element  of  this  public  con- 
trol and  regulation  is  supervision  by  some  State  authority  of  the 
transactions  on  the  Exchange,  of  the  disciplining  of  members, 
and  of  their  solvency.  This  would  require  a  small  army  of 
paid  inspectors  and  accountants.  As  the  Exchange  does  not 
buy  or  sell  it  has  no  records.  The  only  records  of  the  daily 
transactions  on  the  Exchange  are  the  books  and  papers  of  the 
members.  The  transactions  are  constant  and  innumerable. 
Is  there  to  be  a  body  of  public  officials  constantly  examining 
the  books  and  papers  of  hundreds  of  brokers  to  ascertain 
whether  they  have  been  guilty  of  violations  of  the  rules  or  the 
law  for  the  purpose  of  initiating  discipline  or  legal  proceed- 
ings ?  Such  a  system  of  espionage  is  impracticable,  and  if  it 
were  not  impracticable  it  would  be  intolerable. 

The  same  is  true  of  the  examination  of  the  books  of  hun'- 
dreds  of  brokers  to  ascertain  their  solvency  from  day  to  day. 
If  such  a  thing  were  practicable,  what  occasion  is  there  for  it 
considering  the  small  percentage  of  failures  which  occurs,  as 
has  been  shown  ?  That  it  is  not  practicable  is  obvious  to  any 
sensible  man.  Surely  it  is  not  necessary  for  us  to  show  that 
there  is  no  analogy  between  such  conditions  and  the  periodical 
examination  of  banks  by  examiners. 

Public  regulation  and  control  of  the  Exchange  when  ana- 
lyzed is  without  any  substance.  It  is  something  without  any 
useful  purpose,  practicability  or  meaning.  As  a  cure  for  any 
evils  that  exist  it  is  without  efficiency  or  merit.  The  demand 
for  it,  however  honest,  has  no  real  foundation,  and  serves  only 
to  mislead  and  create  prejudice  and  distrust.  The  last  thing 
thought  of  is  to  define  it  as  a  specific  measure  that  can 
be  put  in  operation  to  accomplish  specific  results  ;  and  until 
that  is  done  it  is  not  entitled  to  serious  consideration.  So 
far  it  has  not  been  done,  and  the  blind  faith  in  it  is  part  and 


30 

parcel  of  the  current  belief  that  whatever  there  is  of  wrong  or 
evil  in  business  is  curable  somehow  or  other  by  the  interven- 
tion of  the  State. 

(3)  Incorporation  has  in  it  the  seeds  of  demoralization. 
We  firmly  believe  that  its  probable  consequences  will  be  the  de- 
basement of  the  Exchange  instead  of  the  reform  of  evils, 
which,  if  they  exist  at  all  in  any  real  sense,  are  grossly  exag- 
gerated. 

There  are  various  directions  in  which  incorporation  is 
more  than  likely  to  be  baleful. 

(a)  A  vital  function  of  the  Exchange  is  the  exercise  of  its 
disciplinary  power  over  its  members,  which  has  to  be  taken  in 
connection  with  the  standard  of 'conduct  it  imposes  and  en- 
forces. That  standard  is,  as  we  have  seen,  that  the  conduct 
of  its  members  in  their  transactions  must  conform  to  just  and 
equitable  principles  of  trade.  A  private  association  may  im- 
pose such  a  standard  upon  its  members  though  it  is  higher 
than  the  standard  prescribed  by  law.  The  Exchange  enforces 
its  own  rules  and  standards  through  its  Governing  Com- 
mittee. Written  charges  are  preferred  ;  the  member  is 
given  an  opportunity  to  answer  ;  and  then  there 
is  a  full  hearing  before  the  Governing  Committee,  at  which 
the  member  is  present  to  give  his  own  version  of  the  facts. 
When  a  member  is  expelled  or  suspended  the  penalty  becomes 
operative  immediately  ;  and  the  Courts  do  not  interfere  if  it 
appears  that  the  charge  concerns  a  violation  of  an  existing 
rule ;  that  there  is  evidence  to  support  it ;  and  that  the  Gov- 
erning Committee  acts  in  good  faith  in  its  determination. 

In  White  vs.  Brownell,  %  Daly,  329,  Mr.  Justice  VAN  VORST 
said: 

"  As  this  association  is  not  organized  in  pursuance 
of  any  statute,  nor  the  terms  of  membership  fixed  by 
the  principle  of  the  common  law,  it  follows  that  the 
agreement  which  the  members  make  among  themselves 


31 

on  the  subject,  must  establish  and  determine  the 
rights  of  the  parties  on  the  subject.  The  con- 
stitution of  the  association,  and  its  laws  agreed 
upon  by  the  members,  contains  all  the  stip- 
ulations of  the  parties,  and  is  the  law  which 
should  govern.  *  *  *  No  person  is  entitled  to  mem- 
bership, in  the  Open  Board  of  Brokers,  except  he  is  ap- 
proved by  the  appropriate  committee,  voted  for  by  the 
board,  and  shall  agree  to,  adopt,  and  affix  his  name  to 
the  constitution,  and,  having  done  this,  each  member 
should  stand  by  this  contract.  *  *  * 

"  The  Court  must  regard  the  Constitution  and  laws 
of  this  board  as  the  contract  by  which  all  the  members 
are  bound.  The  Court  cannot  make  any  other  contract 
for  the  parties  than  they  have  solemnly  made  for  them- 
selves." 

"  Such  an  organization  may  prescribe  the  conditions 
upon  which  persons  will  be  admitted  to  membership,  as 
well  as  the  conditions  upon  which  the  continuance  of 
membership  will  depend,  *  *  *  Voluntary  bodies 
of  this  kind  will  be  held  to  the  fair  and  honest  adminis- 
tration of  the  rules  which  are  in  force  when  any  pro- 
ceeding is  instituted  against  a  member ;  but  where  a 
member  is  expelled  in  conformity  with  the  rules,  and 
the  proceedings  are  regular  and  in  good  faith,  it  is  final, 
and  no  judicial  tribunal  can  interfere." 
See,  also, 

Lewis  vs.  Wilson,  121  N.  Y.,  284. 

Neukirch  vs.  Keppler,  56  App.  Div.,  225   (affirmed 

without  opinion  by  the  Court  of  Appeals,  174  N. 

Y.,  509). 
Young  V8.  Eames,  78  App.   Div.,  229  (affirmed  by 

the  Court  of  Appeals  without  opinion,  181  N.  Y., 

542). 

It  is  a  remarkable  fact,  testifying  to  the  ability  and  high 
character  of  the  Governing  Committee,  that  its  action  in  expel- 
ling or  suspending  a  member  has  always  been  sustained  by 
the  courts. 


32 

If  the  Exchange  were  incorporated  would  its  charter  pro- 
vide for  a  judicial  review  on  the  merits  of  the  determina- 
tions of  the  Governing  Committee  expelling  or  suspending  a 
member?  If  it  did  not,  how  long  would  it  be  before  its 
charter  was  amended  to  include  such  a  provision  ?  It  is  easy 
to  realize  the  sentimental  force  of  an  agitation  for  such  a  pro- 
vision industriously  worked  up  by  men  under  charges  or  who 
had  been  expelled.  One  can  hear  the  appeal  that  a  man 
should  not  be  deprived  of  his  membership  without  his  day  in 
a  court  of  law.  The  issue  of  such  an  appeal  is  not  doubtful. 

A  judicial  review  would  inevitably  sap  the  disciplinary 
power  of  its  vitality.  Every  case  would  be  taken  into  court, 
and  injunctions  and  stays  of  proceedings  would  stop  the  exe- 
cution of  the  determination  of  the  Governing  Committee  until 
the  last  court  of  review  was  through  with  the  case.  That  would 
take  two  or  three  years,  and  in  the  meantime  the  member  would 
continue  his  activities  on  the  Exchange.  Then  there  is  no 
comparison  between  the  competency  of  the  Governing  Com- 
mittee as  a  tribunal  to  try  such  cases,  with  its  experience  and 
intimate  knowledge  of  the  business  and  its  appreciation  of 
the  effect  of  the  acts  with  which  the  member  is  charged,  and 
the  competency  of  the  ordinary  judge  without  that  experience, 
knowledge  and  appreciation.  If  the  court  differed  with  the 
Governing  Committee  the  member  would  retain  his  member- 
ship though  his  conduct  had  been  condemned  by  his  associates. 
Discipline  could  not  possibly  be  maintained  under  such  condi- 
tions. Moreover  the  inevitable  tendency  of  this  power  of 
review  by  the  courts  would  be  to  substitute  the  standards 
of  the  law  for  the  more  stringent  standards  of  the  Exchange. 
"  Just  and  equitable  principles  of  trade  "  would  come  to  be 
what  the  courts  declared  them  to  be,  and  the 
analogies  that  the  courts  would  apply  would  be  derived 
from  that  body  of  legal  rules  which  defines  what  acts  are 
wrongful  in  the  sense  that  they  are  a  sufficient  basis  for  an 


33 

action  for  the  recovery  of  damages.  The  Exchange  applies 
the  layman's  view  of  what  are  just  and  equitable  principles  of 
trade,  and  is  governed  more  by  moral  than  strictly  legal  con- 
siderations. There  is  a  wide  difference  in  such  matters  be- 
tween what  is  just  from  the  point  of  view  of  honorable  con- 
duct and  what  is  just  from  the  point  of  view  of  legal  rights. 
A  man  may  have  a  real  grievance  against  another  in  a  business 
matter  without  there  being  the  slightest  violation  of  his  legal 
rights.  It  is  on  this  principle  that  members  of  the  Exchange 
have  been  punished  by  expulsion  or  suspension  for  acts  con- 
trary to  the  morals  of  business,  but  without  any  taint  in  them 
of  wrong  in  a  legal  sense. 

These  are  the  reasons  for  our  statement  that  a  full  judi- 
cial review  of  the  disciplinary  judgments  of  the  Governing 
Committee  would  lower  the  whole  tone  of  the  Exchange  and 
radically  impair  its  standard  of  just,  equitable  and  honest 
dealing.  Any  movement  which  deteriorates  its  standards  is 
inimical  to  the  public  interests  to  a  degree  commensurate  with 
the  vast  dealings  of  which  it  is  the  center  and  with  the  func- 
tion it  performs. 

(b)  Judicial  review  is  also  inappropriate  with  respect  to 
the  listing  of  securities  and  striking  securities  from  the  list. 
Those  are  matters  that  are  now  entirely  subject  to  determina- 
tion by  a  highly  qualified  committee  of  the  Exchange.  The 
questions  they  involve  are  of  a  business  and  not  a  legal  char- 
acter, and  require  for  their  determination  sound  business  judg- 
ment rather  than  the  judicial  cast  of  mind  or  legal  methods. 
Imagine  a  judicial  tribunal  taking  evidence  as  to  whether 
a  security  should  be  listed  or  stricken  from  the  list  and  then 
deciding  the  matter  as  a  legal  question.  The  function 
of  a  judge  is  to  apply  the  law  of  the  land  to  disputes  between 
parties  over  their  legal  rights.  It  is  not  his  function  to 
determine  what  are  proper  securities  to  be  dealt  in  on  a  stock 
exchange.  And  if  it  be  suggested  that  this  function  should  be 


34 

conferred,  not  upon  the  courts,  but  upon  State  officials,  who 
will  maintain  that  they  would  be  more  competent  to  decide  such 
questions  than  the  members  of  a  committee  of  the  Exchange 
selected  because  of  their  standing,  experience  and  qualifi- 
cations? Who  would  prefer,  as  to  such  a  matter,  the  judg- 
ment of  State  officials  who  come  and  go  to  that  of  men  whose 
qualifications  are  those  of  genuine  experts  ? 

(c)  The  comprehensive  objection  to  incorporation  is  that  it 
converts  a  self-governing  body  into  one  subject  to  external 
control  in  all  the  ramifications  of  its  functions  and  opera- 
tions. Responsibility  is  weakened  by  the  commingling 
of  internal  and  external  authority,  and  responsibility  is 
essential  to  integrity  and  efficiency.  It  is  not  the  case 
of  a  trust  relation  involving  money  or  property,  like  a 
bank  or  insurance  company,  with  respect  to  which  regulation 
has  a  distinct  function  and  use.  State  control  of  a  body 
like  the  Exchange  inevitably  impairs  its  own  responsi- 
bility for  the  conditions  which  exist  at  any  time.  Divided 
between  two  regulative  powers  or  authorities  it  is  bound  to  be 
weak  and  inefficient. 

Moreover,  with  incorporation  the  element  of  permanence 
will  disappear.  Every  year  there  will  be  efforts  to  amend 
the  charter  inspired  by  every  sort  of  motive,  good  and  bad. 
The  Exchange  is  peculiarly  a  target  for  such  attacks. 
It  is  sure  to  be  continually  embroiled  with  proposed  legis- 
lation and  distracted  by  legislation  that  has  been  enacted. 
Members  as  well  as  non-members  with  grievances,  how- 
ever imaginarj'  or  the  result  of  their  own  negligence  or  im- 
prudence, will  rush  to  the  legislature  with  amendments  to  still 
more  enfeeble  its  government.  These  are  the  conditions  which 
will  prevail  beyond  any  sort  of  doubt ;  and  they  will  surely 
weaken  its  government,  and  eliminate  from  it  many  of  the  strong 
and  able  men  who  devote  their  time  and  energy  to  it  out  of  a 
spirit  of  true  devotion  to  its  best  interests.  The  office  of  Gov- 
ernor will  cease  to  be  the  honor  that  it  is  ;  the  membership  of 


35 

the  Governing  Committee  will  be  less  constant  ;  and  the  ad- 
ministration of  the  affairs  of  the  Exchange,  assailed  and  har- 
rassed  by  outside  interference,  must  sink  to  lower  levels. 

(d)  There  is  not  the  excuse  for  State  control  that  the  busi- 
ness done  on  the  Exchange  is  a  monopoly. 

There  is  no  monopoly  if  securities  are  marketable  though  not 
listed  upon  the  Exchange.  That  they  are  appears  quite  clearly 
from  the  testimony  of  Mr.  Mabon  (pages  372-3,  405-6),  and  Mr. 
Pomroy  (pages  489,  492,  494,  496),  which  is  confirmed  by  the 
fact  that  the  number  of  corporations  in  the  United  States 
is  upwards  of  two  hundred  and  seventy -two  thousand  (272,000)  ; 
that  the  aggregate  amount  of  the  stock  of  these  corporations 
is  fifty-eight  billion  (58,000,000,000)  dollars  ;  that  their  bond 
issues  aggregate  thirty  billion  (30,000,000,000) ;  and  that  there 
are  listed  on  the  Exchange  five  hundred  and  fifty  (550)  issues  of 
stock,  having  an  aggregate  par  value  of  thirteen  billion 
(13,000,000,000)  dollars,  and  one  thousand  and  twenty-eight 
(1,028)  issues  of  bonds  having  an  aggregate  par  value  of 
thirteen  billion  (13,000,000,000).  Thus  it  is  evident  that  stocks 
and  bonds  can  be  and  are  sold  to  an  enormous  extent  else- 
where than  upon  the  Exchange. 

Any  well  known  stock  can  be  readily  disposed  of,  and 
money  borrowed  upon  it,  although  not  listed  on  the  Exchange. 
Transactions  in  such  stocks  take  place  all  the  time  in  great 
volume  elsewhere.  Brokers  interested  in  particular  stocks  are 
known  to  other  brokers,  and  there  is  no  trouble  whatever  in 
finding  a  market  through  them  for  non-listed  stocks.  Bonds 
are  dealt  in  outside  the  Exchange  to  an  amount  exceeding 
many  fold  the  transactions  in  bonds  upon  its  floor. 

Bankers,  brokers  and  dealers,  not  the  Exchange,  are  the 
essential  mediums  of  the  purchase  and  sale  of  securities.  In 
the  case  of  inactive  securities  the  machinery  of  ^private  sale 
through  brokers  is  fully  sufficient  to  bring  buyers  and  sellers 
together  readily  and  without  inconvenience.  In  the  case  of  a 
security  that  is  active,  that  is  to  say,  where  there  are  many 


36 

people  constantly  offering  to  sell  and  offering  to  buy,  so  that 
the  trading  is  in  large  volume,  the  facilities  afforded  by  the 
Exchange  are  a  great  convenience  in  bringing  buyers  and 
sellers  together,  but  they  are  not  indispensable.  If  the  se- 
curity is  not  listed  on  the  Exchange,  the  buyers  and  sellers,  or 
th  ir  brokers,  will  find  a  common  meeting  place  elsewhere. 

Listing  upon  the  Exchange  imparts  to  a  security  a  pe- 
culiar value,  not  because  such  listing  is  essential  to  its  market- 
ability or  availability  as  collateral,  but  because  it  makes  it  more 
acceptable  to  those  to  ivhom  it  is  offered  for  sale  or  as  col- 
lateral. It  is  more  acceptable  because  the  listing  implies 
that  it  meets  the  requirements  prescribed  by  the  Ex- 
change ;  because  the  Exchange  has  built  up  a  great  and 
enviable  reputation  ;  and  because  a  great  proportion  of  the 
people  who  purchase  and  sell  securities  deal  through  members 
of  the  Exchange  owing  to  the  standing  which  membership 
gives. 

These  circumstances,  however,  do  not  imply  that  the  Ex- 
change is  an  exclusive  market. 

(4)  To  coerce  the  Stock  Exchange  to  accept  incorporation 
would  be  unjust.  It  has  "  asked  and  obtained  nothing  from 
the  State  except  that  protection  which  the  law  affords  ta 
every  citizen "  ( Wilson  vs.  Smith,  18  N.  T.  State  Rep.± 
78).  As  a  voluntary  association  for  the  transaction  of 
business  by  its  members  under  its  rules  it  was  formed  more 
than  three  quarters  of  a  century  ago,  and  has  since  grown  and 
developed,  without  contravening  any  law  of  the  state  or  any 
principle  of  public  policy.  Membership  has  come  to  have 
a  large  pecuniary  value  and  represents  a  considerable  invest- 
ment by  every  member.  For  many  years  the  consideration  for 
a  seat  has  ranged  between  fifty  and  ninety  thousand  dollars. 
Every  member  has  made  this  investment  in  the  Exchange 
as  a  self-governing  voluntary  association,  and  in  the  expecta- 
tion that  it  would  continue  to  control  and  manage  its  own 
affairs.  The  State  cannot  by  a  direct  enactment  incorporate 


37 

the  Exchange  without  the  consent  of  its  members,  because  any 
such  enactment  would  be  unconstitutional.  To  accomplish  that 
result  indirectly  through  coercion  and  in  disregard  of  the  wishes 
of  its  members,  if  that  can  be  done  as  it  seems  to  be  assumed 
it  can  be,  would  be  a  radical  interference  with  their  rights 
and  privileges  existing  under  the  sanction  of  the  law,  the  pecu- 
niary consequences  of  which  they  will  have  to  bear.  The  con- 
version of  membership  in  this  voluntary  association  based 
on  a  contract,  which  the  State  cannot  alter  or  impair,  into 
membership  in  a  corporation  under  a  charter  subject  in  every 
detail  to  the  plenary  legislative  power  of  the  State  would 
be  followed  by  an  enormous  shrinkage  in  its  pecuniary 
value.  Is  that  just?  To  ask  this  question  is  to  answer  it. 
It  is  confiscation  pure  and  simple. 

(5)  We  assert  that  no  regulation  whatsoever  is  within 
the  power  of  Congress.  But  we  are  far  from  asserting  that 
the  State  is  without  any  power  of  regulation.  That  the 
State  may  legislate  with  respect  to  transactions,  such  as 
improper  manipulation,  is  unquestionable.  How  effectively 
it  can  legislate  as  to  such  matters  is  another  question. 
Hopes  and  expectations  in  that  direction  are  apt  to  be 
in  the  inverse  ratio  of  accurate  knowledge  and  experience. 
It  is  a  regulation  interfering  with,  and  diminishing,  the 
responsible  self-government  of  the  Exchange  that  we  argue 
against  as  detrimental  in  an  incalculable  degree  as  well 
to  the  interests  of  the  public  as  to  those  of  the  Exchange. 
There  is  no  justification  for  the  assertion  that  that  government 
is  or  has  been,  blind,  sordid  or  unintelligent.  The  history 
of  the  Exchange  as  a  whole  is  conclusive  evidence 
to  the  contrary.  It  would  not  stand  at  the  head  of  the  Ex- 
changes of  the  world  if  those  had  been  its  characteristics.  It 
is  in  the  nature  of  things  that  there  should  have  been  sporadic 
evils  ;  but  an  institution  is  to  be  judged  by  its  normal  condi- 
tions and  not  by  abnormal  incidents.  Due  allowance  is  to  be 
made,  so  far  as  the  abnormal  is  concerned,  for  the  patent 


38 

difficulty  of  framing  regulations  that  avoid,  on  the  one  hand, 
being  too  oppressive,  and,  on  the  other  hand,  defy  evasion  and 
circumvention;  and  the  better  course  is  to  trust  to  measures 
being  finally  worked  out  to  prevent  them  from  within  rather 
than  to  arbitrarily  and  impetuously  impose  them  from  without. 
The  wise  man  will  find  more  hope  in  what  the  Governing  Com- 
mittee can  accomplish  than  in  drastic  emergency  legislation. 


IV. 

Speculation. 

The  fact  that  a  considerable  volume  of  the 
transactions  on  the  Exchange  is  speculative  in 
character  is  not  a  just  ground  for  criticising  the 
Exchange,  its  organization  or  management. 

We  do  not  propose  to  discuss  the  general  subject  of  specu- 
lation at  length  or  in  detail.  It  is  an  old  theme  with  economists, 
financiers  and  moralists,  and  there  is  nothing  new  to  be  said 
about  it.  Like  all  other  activities  on  a  large  scale  it  has  its  good 
and  its  bad  side,  and  all  that  is  attainable  is  the  correction  of 
the  latter  in  so  far  as  it  can  be  accomplished  without  impair- 
ing its  necessary,  useful  and  beneficent  function.  That  is  the 
object  of  many  of  the  rules  of  the  Exchange  to  which  we  have 
referred,  and  the  only  practical  question  is  whether  it  is  blam- 
able  for  not  having  gone  far  enough  in  that  direction,  and 
if  it  is,  whether  the  most  effective  cure  is  not  to  be 
found  in  action  by  the  Exchange.  A  few  general 
observations  may  not  be  amiss  to  relieve  the  subject 
from  misconceptions  and  exaggerations,  and  the  prejudices 
they  engender.  They  will  help  at  any  rate  to  substitute 


39 

actual  facts  and  conditions  for  general  and  undiscriinin- 
ating  impressions. 

In  the  year  1912  the  par  value  of  the  stocks  listed  upon 
the  Exchange  was  about  thirteen  billion  (13,000,000,000) 
dollars,  and  the  par  value  of  the  stocks  bought  and  sold  was 
substantially  the  same.  Thus,  in  the  course  of  a  year,  the 
number  of  shares  of  stock  bought  and  sold  was  substantially 
the  same  as  the  number  of  shares  of  stock  listed. 

The  aggregate  value  of  the  bonds  listed  upon  the  Exchange 
in  1912  was  about  thirteen  billion  (13,000,000,000)  dollars,  and 
the  total  amount  of  bonds  bought  and  sold  was  only  six  hundred 
and  seventy-four  million  (674,000,000).  Speculation  in  bonds 
on  the  Exchange  is,  therefore,  a  negligible  quantity. 

Even  in  the  case  of  stocks  in  which  the  trading  is  quite 
extensive  it  does  not  follow  that  the  great  bulk  of  the  trading 
is  of  a  speculative  character.  Temporary  investments  and 
changes  of  investments  account  for  a  considerable  volume  of 
dealings.  It  is  also  a  well  known  fact  that  there  is  a  large 
volume  of  stocks  that  are  not  transferred  on  the  books  of  the 
companies  issuing  them  even  in  the  case  of  purchases  for 
other  than  speculative  purposes.  Let  us  assume,  however, 
that,  in  the  case  of  stocks  which  are  bought  and  sold  several 
times  over  in  the  course  of  a  year,  the  bulk  of  the  trading  is 
of  a  speculative  character.  The  stocks  that  are  the  subject  of 
such  speculation  may  be  the  stocks  of  enterprises  yielding  re- 
turns that  fluctuate  widely  from  year  to  year  ;  or  they  may 
represent  enterprises  in  process  of  development,  the  normal 
value  of  which  for  investment  purposes  has  not  been  fixed, 
and  which,  therefore,  are  traded  in  upon  the  basis  of  their 
prospective  value  rather  than  their  current  value  for  invest- 
ment purposes. 

Speculation  in  stocks,  taken  as  a  whole,  is  a  process  by 
which  the  risk  of  loss  and  the  chance  of  profit  in  corporate 
enterprises  is  divided  up  among  the  speculative  community 
during  the  period  that  elapses  between  the  floating  of  the 


40 

enterprises  and  the  time  when  their  securities  attain  a  fixed 
and  permanent  investment  value. 

The  originators  of  a  great  many  sound  enterprises  would  be 
unable  to  carry  them  without  assistance  until  their  securities 
attained  a  permanent  investment  value,  and  they  have  to  de- 
pend upon  the  fact  that  the  speculative  community  is  ready 
to  carry  all,  or  a  part  of,  the  securities  over  this  period.  As 
the  securities  become  more  and  more  stable  they  pass  from  less 
conservative  to  more  conservative  hands,  until  at  last  most  of 
them  are  held  by  permanent  investors.  When  comment  is 
made  upon  the  amount  of  money  which  is  being  constantly 
loaned  by  the  banks  and  others  for  the  purposes  of  stock 
speculation,  the  greater  part  of  it  being  loaned  upon  call,  the 
fact  is  too  generally  overlooked  that  this  money  so  loaned  is 
to  an  appreciable  extent  the  safe  proportion  of  money  employed 
in  carrying  enterprises  of  the  country  over  the  early  period  of 
their  development. 

The  speculators  in  stocks,  who  in  the  main  make  up  the 
speculative  community  to  which  we  have  referred,  trade  in 
securities  as  merchants  trade  in  commodities ;  that  is  to  say, 
they  buy  in  the  expectation  of  selling  at  a  higher  price  for 
their  profit,  differing  in  this  from  investors,  who  look  for  their 
profit  to  the  return  from  the  securities  in  the  shape  of  income. 
Trading  in  stocks  and  other  securities  as  such  is  just  as  legiti- 
mate as  any  mercantile  business.  The  traders  who  base  their 
transactions  on  the  study  of  the  properties  represented  by 
the  securities  in  which  they  deal,  and  their  knowledge  of  the 
inherent  value  of  the  securities  derived  from  such  study,  are 
usually  the  most  conservative  of  the  dealers  in  securities. 
The  traders  who  look  for  quick  profits  in  slight  changes  of 
market  prices  arising  from  fluctuations  in  the  condition  of  the 
money  market  or  other  causes,  which  they  watch  closely  with  a 
-  trained  eye,  carry  on  their  operations  through  perfectly  legiti- 
mate and  lawful  transactions. 

The  tendency  of  the  free  play  of  speculation  is  to  provide  a 


41 

broad,  open,  active  market  and  to  keep  the  price  of  a  security 
somewhere  around  its  true  value  ;  at  least,  somewhere  around 
the  average  value  put  upon  it  by  the  judgment  of  those  who 
are  interested  in  it  and  have  a  knowledge  of  the  facts  relating 
to  it.  A  security  is,  of  course,  subject  to  constant  fluctuations 
above  and  below  the  true  value ;  but  the  dealings  of  the  specu- 
lators who  are  disposed  to  purchase  whenever  it  falls  below 
the  true  value  and  to  sell  whenever  it  goes  above,  have  a  strong 
tendency  to  bring  it  back  to  and  keep  it  around  its  true  value 
under  existing  conditions. 

The  elimination  of  speculation  by  law,  if  that  were  possi- 
ble, would  result  in  periods  of  extraordinary  inflation  of  prices 
followed  by  their  rapid  fall  and  disastrous  panics. 

It  is  said  that  there  is  much  speculation  by  people  who 
know  nothing  of  inhsrent  values  and  market  conditions,  and 
who  do  not  apportion  their  commitments  to  their  resources. 
That  will  be  true  as  long  as  human  beings  are  free  agents. 
There  may  be  safeguards  against  it,  but  there  cannot  be 
absolute  prevention  unless  all  speculation  is  sought  to  be 
prevented,  which,  as  we  have  seen,  is  undesirable  even  if  it 
were  attainable.  The  difficulty  in  dealing  with  this  problem 
is  that  whether  a  particular  transaction  of  a  particular  in- 
dividual is  in  fact  legitimate  speculation  or  not  is  known 
only  to  himself,  for  it  depends  upon  his  study  of  the  situa- 
tion, the  degree  of  his  knowledge,  the  extent  of  his  re- 
sources in  comparison  with  the  risk  .  that  he  under- 
takes, and  other  matters  that  he  alone  can  know. 
There  is  no  way  of  discriminating  by  rules  or 
regulations  between  legitimate  and  reckless  speculation, 
or  of  applving  them  if  they  could  be  formulated,  for  the 
reason  that  general  rules  must  deal  with  all  men  alike, 
and  not  with  the  particular  motives  or  condition  of  the  indi- 
vidual. The  matter  may  be  put  in  this  way  :  The  right  to 
buy  and  sell  securities  is  just  as  much  an  inherent  right  as 
the  right  to  buy  and  sell  any  other  commodity.  This  right 


42 

can  be  exercised  unwisely  and  recklessly  ;  bat  there  is  no  way 
of  prescribing  by  law  or  rule  that  a  ri^ht  may  be  exercised 
wisely  but  may  not  be  exercised  unwisely.  The  possession  of 
the  right  carries  with  it  the  possibility  of  its  unwise  exercise. 
We  close  this  discussion  with  a  pertinent  quotation  from 
the  convincing  and  lucid  article  by  Professor  Emery  on 
"  Should  speculation  be  regulated  by  Law,"  in  the  "  Journal  of 
Accountancy,"  for  April,  1908. 

"  Speculation  in  securities  is  bound  up  in  the  closest 
way  with  the  whole  matter  of  the  investment  of  capital 
and  the  accumulating  of  the  necessary  means  for  carry- 
out  great  industrial  enterprises.  Just  in  so  far  as  the 
stock  market  has  a  speculative  clientele,  it  becomes  an 
open  and  broad  market  and  facilitates  the  disposal  of 
great  issues  of  stocks  and  bonds  which  are  necessary  for 
the  carrying  out  of  the  industrial  undertakings  of  the 
present  age. 

"  The  limitation  of  this  broad  market  must  in- 
variably prove  a  hindrance  in  the  financing  of 
the  most  legitimate  enterprises,  and  all  inter- 
ference with  the  freedom  of  speculation  must 
inevitably  lessen  openness  of  the  market.  If  we 
attempt  to  secure  the  benefits,  while  restricting  the 
evils  of  speculation,  through  discriminating  against 
certain  kinds  of  transactions,  we  find  it  impossible  to 
really  discriminate  in  any  way  according  to  the  form 
of  the  transactions,  while,  inevitably,  by  restricting  the 
forms  of  commerce  and  of  commercial  methods,  we  put 
a  severe  handicap  upon  entirely  legitimate  enterprise. 
There  is  only  one  way  in  which  speculation  can  be 
stopped  altogether,  and  that  is  by  giving  up  the  system 
of  private  property  and  adopting  the  Socialistic  state. 

"  It  will  be  seen  then  that  speculation  is  not  a  prod- 
uct of  stock  and  produce  exchanges.  Speculation  existed 
long  before  them,  and  it  was  only  when  speculation 
from  natural  causes  became  more  and  more  important 
that  men  engaged  chiefly  in  speculative  trade  formed 
organizations  in  order  to  adopt  a  general  system  of 
rules  for  the  conduct  of  such  business. 


43 

"  The  real  cause  then  of  the  modern  exchange  in 
modern  speculation  is  to  be  found,  so  far  as  com- 
modities are  concerned,  in  the  marvelous  improvements 
in  the  method  of  transportation  and  communication 
which  have  made  the  market  for  staple  commodities  a 
world  market,  in  which  prices  are  determined  by  the 
condition  of  supply  and  demand  of  many  different  sec- 
tions separated  by  thousands  of  miles. 

"  So  far  as  speculation  in  stocks  is  concerned  this 
has  been  the  inevitable  result  of  the  enormous  multi- 
plication of  securities,  due  to  the  extension  of  corporate 
methods  to  business,  which  in  itself  is  the  result  of  huge 
modern  enterprises  demanding  contributions  of  capital 
from  a  large  number  of  small  investors.  The  ma- 
terial progress  of  the  last  half  century  would  have 
been  impossible  without  such  investment.  Such 
investment  would  have  been  impossible  without 
the  multiplication  of  such  securities  of  varying 
values,  and  the  multiplication  of  such  securities  in- 
evitably brings  about  speculation. 

"  Speculation,  even  on  the- part  of  the  public,  with 
all  its  evils,  has  a  very  important  beneficial  effect. 
Unless  the  public  speculates  to  some  extent  the  market 
will  not  only  be  very  restricted  but  will  be  in  con- 
sequence much  more  open  to  manipulation.  The  bigger 
and  broader  the  market  the  less  chances  there  are  for 
rigging  prices.  It  may  seem  a  very  high  price  to  pay 
for  the  open  market  that  the  speculative  spirit  should 
continue  on  the  part  of  the  public,  but  it  would  be  a 
mistake  to  suppose  that  speculation  can  be  confined 
to  a  few  great  operators  and  still  offer  the  benefit  which 
the  present  market  gives. 

"  From  a  study  of  the  effects  of  speculation  and  the 
effects  of  all  suggested  methods  of  controlling 
it,  the  conclusion  is  almost  irresistible :  that 
legitimate  and  illegitimate  transactions  are 
so  closely  bound  together,  and  the  whole  business  of 
speculation  is  so  closely  connected  with  the  interests  of 
actual  commerce,  that  any  interference  with  the  delicate 
machinery  by  the  blundering  fingers  of  the  law  will 
diminish  the  beneficial  elements  of  speculation  without 
effectively  diminishing  its  evils. 


44 

V. 

Manipulation. 

Manipulation  is  a  term  which  in  itself  has  a  sinister  implica- 
tion. It  is  applied  to  a  mass  of  transactions  which  differ  in 
their  purpose  and  nature,  with  the  result  that  this  sinister  im- 
plication of  the  term  subjects  them  to  wholesale  condemna- 
tion. It  has  been  so  emphasized  as  to  create  the  impression 
that  it  comprehends  a  vast  mass  of  the  transactions  on  the 
Exchange.  This  is  as  unjust  as  it  is  prejudicial.  It  is  to  this 
loose  use  of  words  and  phrases  that  the  deplorable  tendency 
of  the  times  to  heap  undiscriminating  obloquy  on  our  im- 
portant business  and  financial  institutions  is  largely  attribut- 
able. It  is  necessary,  therefore,  to  differentiate  the  trans- 
actions to  which  the  term  is  applied  in  order  to  determine  to 
which  of  them  it  is  properly  applied  ;  and  then  to  differentiate 
the  transactions  to  which  it  is  properly  applicable. 

(a)  Evidence  was  produced  that  the  stocks  of  a  few  com- 
panies had  been  bought  and  sold  many  times  over  in 
the  course  of  a  single  year.  That  fact  may  be  entirely 
due  to  speculation,  with  which  we  have  dealt,  and  not 
at  all  to  manipulation  in  any  proper  sense  of  the  term. 
Any  activity  of  a  stock  from  purely  natural  causes  tends 
to  develop  speculation,  and  particularly  the  form  of  it 
which  seeks  to  realize  quick  profits  from  slight  changes 
in  price.  Arbitrage  dealings  between  New  York  and 
London  and  other  markets  assume  very  large  proportions, 
traders  buying  in  one  market  and  selling  in  another  in 
order  to  profit  by  slight  differences  in  the  prices  prevailing 
in  the  different  markets.  Stocks  are  daily  bought  in  great 
quantities,  to  be  sold  quickly  on  slight  variations  of 
price.  These  transactions  attain  to  a  large  volume  ; 
and  are  accompanied  by  comparatively  few  transfers 


45 

on  the  books  of  the  companies  as  the  stock  certificates  en- 
dorsed in  blank  pass  from  hand  to  hand.  Hence  volume  of 
trading  due  to  ordinary  speculation  is  not  to  be  confounded 
with  manipulation,  or  treated  as  manipulation  in  any  sense. 
The  fact  is  that  the  transactions  for  investment  and  for  ordi- 
nary speculation  comprehend  the  great  bulk  of  the  transac- 
tions on  the  Exchange. 

(b)  We  will  roughly  define  "  manipulation  ",  for  the  pur- 
poses of  this  argument,  as  the  creation  of  activity  in  a  stock, 
by  buying  and  selling  orders  emanating  from  the  same  man 
or  group  of  men,  to  make  a  market  for  the  stock,  or  to 
raise  or  lower  its  price  in  the  expectation  of  a  speculative 
profit.  These  are  the  transactions  of  which  we  have  said  that 
their  volume  is  a  very  minor  quantity  as  compared  with  the 
transactions  for  the  purposes  of  investment  or  ordinary  specu- 
lation. The  forms  of  manipulation  as  thus  defined  vary  in 
essential  matters  and  require  further  analysis. 

(1)  Such  dealings  in  a  new  stock  conducted  in  good  faith 
to  make  a  market  for  it  at  its  true  value,  or  what  is  believed 
to  be  its  true  value,  are  claimed  by  eminent  authorities  to  be 
legitimate  and  necessary. 

This  form  of  manipulation  involves  the  execution  of  selling 
and  purchasing  orders  given  in  the  same  interest  under  such 
conditions  that  the  actual  transfers  of  title  may  be  less  than 
the  apparent  volume  of  transactions  upon  the  floor.  One  view 
to  take  of  it  is  that  suggested  in  the  course  of  the  examination 
of  various  witnesses  ;  i.  e.,  that  it  represents  a  stock  as 
active,  which  is,  in  fact,  inactive,  and  that  its  purpose  is  to 
mislead  in  somewhat  the  same  way  as  a  mock  auction.  The 
other  view  is  that,  so  long  as  the  offers  to  buy  and  the  offers 
to  sell  are  bona  fide  offers  which  any  one  who  chooses  may 
accept,  they  are  actual  indications  of  market  conditions  ;  that 
is  to  say,  of  the  price  at  which  the  stock  in  question  can  be 
bought  and  sold. 


40 

The  Hughes  Commission  said  of  this  form  of  manipula- 
tion : 

"  The  first  kind  of  manipulation  has  certain  advan- 
tages, and  when  not  accompanied  by  '  matched  orders  ' 
in  unobjectionable  per  se.  It  is  essential  to  the  organi- 
zation and  carrying  through  of  important  enterprises, 
such  as  large  corporations,  that  the  organizers  should 
be  able  to  raise  the  money  necessary  to  complete  them. 
This  can  be  done  only  by  the  sale  of  securities.  Large 
blocks  of  securities,  such  as  are  frequently  issued  by 
railroad  and  other  companies,  cannot  be  sold  over  the 
counter  or  directly  to  the  ultimate  investor,  whose 
confidence  in  them  can,  as  a  rule,  be  only  gradually 
established.  They  must  therefore,  if  sold  at  all,  be 
disposed  of  to  some  syndicate,  who  will  in  turn  pass 
them  on  to  middlemen  or  speculators,  until,  in  the 
course  of  time,  they  find  their  way  into  the  boxes  of  in- 
vestors. But  prudent  investors  are  not  likely  to  be 
induced  to  buy  securities  which  are  not  regularly 
quoted  on  some  exchange,  and  which  they  cannot  sell, 
or  on  which  they  cannot  borrow  money  at  their  pleas- 
ure. If  the  securities  are  really  good  and  bids  and 
offers  bona-Jlde,  open  to  all  sellers  and  buyers,  the  oper- 
ation is  harmless.  It  is  merely  a  method  of  bringing 
new  investments  into  public  notice." 

The  question  whether  such  manipulation  is  legitimate  in 
any  particular  case  must  depend  upon  whether  the  transac- 
tions have  a  tendency  to  mislead.  When  the  persons  conducting 
the  transactions  confine  themselves  to  buying  from,  and  selling 
to,  others  than  themselves,  thus  furnishing  a  market  for  those 
who  wish  to  buy  or  to  sell,  we  are  unable  to  see  any  just 
grounds  for  criticism.  If,  however,  they  give  out  orders  in  such 
a  way  that  transactions  do  not  result  in  a  real  change  of 
ownership,  although  the  offers  to  purchase  and  sell  are  made 
in  the  open  market  where  anybody  is  free  to  accept  them  and 
actual  delivery  between  brokers  is  made,  there  is  a  question 
which  is  engaging  the  serious  consideration  of  the  Exchange 


47 

whether  such  transactioDS  may  not  have  a  tendency  to  mis- 
lead, and  should  not  be  treated  as  fictitious  whenever  mem- 
bers of  the  Exchange  participate  in  them  with  knowledge  of 
their  true  character. 

(2)  Another  form  of  manipulation  is  described  by  the 
Hughes  Commission  as  follows  : 

"  That  which  is  designed  to  serve  merely  speculative 
purposes  in  the  endeavor  to  make  a  profit  as  the  result 
of  fluctuations  which  have  been  planned  in  advance." 

Of  it  the  Commission  says  : 

"  The  second  kind  of  manipulation  mentioned  is 
undoubtedly  open  to  serious  criticism.  It  has  for  its 
object  either  the  creation  of  high  prices  for  particular 
stocks,  in  order  to  draw  in  the  public  as  buyers  and  to 
unload  upon  them  the  holdings  of  the  operators,  or  to 
depress  the  prices  and  induce  the  public  to  sell.  There 
have  been  instances  of  gross  and  unjustifiable  manipu- 
lation of  securities,  as  in  the  case  of  American  Ice 
stock.  While  we  have  been  unable  to  discover  any 
complete  remedy  short  of  abolishing  the  Stock  Ex- 
change itself,  we  are  convinced  that  the  Exchange  can 
prevent  the  worst  forms  of  this  evil  by  exercising  its 
influence  and  authority  over  the  members  to  prevent 
them.  When  continued  manipulation  exists  it  is 
patent  to  experienced  observers." 

This  is  one  of  the  most  difficult  and  complex  problems 
with  which  the  Exchange  has  had  to  deal.  It  is  vastly  more 
complex  than  the  description  of  it  seems  to  indicate.  The 
plan  or  scheme  which  that  form  of  manipulation  involves 
is  most  likely  to  be  a  plan  or  scheme  of  persons  out- 
side the  Exchange  over  whom  it  has  no  jurisdiction, 
which  is  worked  through  orders  to  different  unconnected 
brokers  that  do  not  differ  from  the  usual  orders  of  cus- 
tomers to  their  brokers.  A  broad  prohibitive  rule  would 
have  no  efficacy  in  that  case  because  of  the  innocence  of  the 


48 

brokers,  The  natural  effect  of  any  dealings  on  a  large 
scale  is  to  produce  a  fluctuation  in  prices,  and  it  is  difficult  to 
draw  the  line  between  an  adjustment  of  baying  and  selling 
orders  which  constitutes  legitimate  speculation  and  such  an 
adjustment  which  would  bring  the  transaction  as  a 
whole  within  the  definition  of  improper  manipulation. 
The  dangei  of  any  rule  to  meet  this  form  of  manipulation, 
however  carefully  it  may  be  framed,  is  that  it  is  likely  to 
bring  within  its  scope  perfectly  legitimate  transactions  and 
thus  curtail  the  usefulness  of  the  Exchange.  So  far  the  efforts 
to  frame  a  specific  rule  of  that  kind  have  not  produced  one 
which  has  commanded  sufficient  approval  to  warrant  its  adop- 
tion. There  has  been  a  natural  and  wise  disinclination  to 
enact  a  rule,  in  addition  to  the  existing  rules,  to  reach  a 
sporadic  evil  which  would  also  continuously  restrict  legiti- 
mate dealings.  It  is  to  be  borne  in  mind  that  what  there 
is  of  the  evil  is  sporadic,  and  that  the  officers  of  the  Exchange 
see  it  in  its  true  proportion,  which  is  very  different  from  the 
proportion  popularly  assigned  to  it  through  misinformation. 

(c)  Existing  rules  and  practices  of  the  Exchange  in  re- 
straint of  manipulation  are  : 

FIRST.  The  requirements  of  the  Listing  Committee  that  no 
stock  shall  be  admitted  to  dealings  upon  the  Exchange  until 
it  has  been  sufficiently  distributed  for  an  open  market. 

SECOND.  The  powers  of  the  Governing  Committee  and  the 
Stock  List  Committee  to  strike  securities  from  the  list  or  to 
suspend  dealings  in  securities. 

THIRD.  The  provision  of  the  Constitution  prohibiting 
fictitious  transactions,  including  "  matched  "  orders  and 
"  wash  "  sales. 

FOURTH.  The  rule  which,  in  its  present  form,  was  adopted 
in  1910  pursuant  to  the  suggestions  of  the  Hughes  Com- 
mission, and  which  provides  (pages  76-77),  that  "  all  bids 
and  offers  on  larger  lots  shall  be  considered  to  be  for  any 
part  thereof  in  lots  of  100  shares  or  multiples  thereof,  and 


49 

if  a  bid  is  made  for  a  larger  lot  of  stock  above  the 
price  at  which  smaller  lots  are  offered,  or  if  a  transaction  is 
made  in  a  larger  lot  above  the  price  at  which  smaller  lots  are 
offered,  such  bidder  or  buyer  shall  be  compelled  to  buy  any 
or  all  of  the  smaller  lots  which  were  publicly  offered  at  the 
time,  at  the  lower  price,  up  to  the  amount  of  the  bid  for  the 
larger  lot ; "  and  similarly  as  to  offers  to  sell. 

These  rules  are  rigidly  enforced,  and  experience  has  demon- 
strated them  to  be  an  effective  restraint  on  improper  manipula- 
tion, though  not  to  the  point  of  absolute  prevention.  They 
accomplish  so  much  that  they  cannot  be  ignored  and  should 
not  be  belittled.  They  have  eliminated  improper  manipulation 
on  any  scale  as  a  common  practice.  The  problem  now  is  to 
prevent  even  occasional  operations  of  the  kind.  In  our  judg- 
ment more  dependence  is  to  be  placed  on  the  Exchange  itself 
working  out  a  solution  than  upon  any  statute  that  can  be 
drawn. 

The  Governing  Committee  has  been  for  some  time  past, 
and  is  now,  considering  the  whole  subject  of  manipulation  to 
determine  whether  further  prohibitory  rules  and  provisions 
with  respect  to  it  can  be  effectively  framed. 


VI. 

Short  Sales. 

We  believe  that  much  of  the  disapprobation  with  which 
the  short  selling  of  stock  is  regarded  by  many  people  would 
be  removed  by  a  clear  understanding  on  their  part  of  just 
what  it  is.  Contracts  for  the  sale  of  securities  made  on  the 
Exchange  contemplate  the  delivery  of  the  securities  and 
payment  therefor  on  the  day  subsequent  to  the  day  of  the  con- 
tract, and  this  is  true  whether  the  sales  are  short  sales  or 
sales  of  securities  in  hand.  A  broker  receives  from  his  prin- 


50 

cipal  an  order  to  sell  a  hundred  shares  of  stock.  In  the  exe- 
cution of  this  order  he  makes  a  contract  to  sell  and  de- 
liver the  stock,  delivery  to  be  made  on  the  following  day 
and  payment  in  full  to  be  made  at  the  same  time.  In 
the  simplest  case  the  customer  has  the  stock  and  fur- 
nishes it  to  the  broker  before  the  time  for  delivery  under 
the  contract  of  sale.  In  all  other  cases  the  sale  is  a  short 
sale. 

The  customer  may  be  away  from  New  York  and  his  stock 
may  be  in  a  safe-deposit  box  to  which  access  cannot  be  ob- 
tained until  his  return.  He  may  live  in  London,  so  that  many 
days  will  elapse  before  it  can  be  delivered  in  New  York.  It 
may  be  pledged  in  a  bank,  so  that  it  cannot  be  obtained  until 
a  loan  is  paid  off.  He  may  not  own  the  stock,  but  may  be 
entitled  to  get  it  later  under  a  subscription  contract  or  under- 
writing agreement,  or  some  other  sort  of  executory  contract. 
Lastly,  he  may  not  own  the  stock  or  have  any  contract  entitling 
him  to  receive  it,  but  may  have  made  the  sale  because  he 
knows  that  he  can  buy  the  stock  later  and  believes  than  he  can 
buy  it  at  a  lower  price. 

In  all  these  cases  the  broker  provides  the  stock  with 
which  to  make  delivery  to  the  purchaser,  and  the  customer 
sooner  or  later  returns  to  the  broker  the  amount  of  stock  so 
advanced.  He  may  do  this  as  soon  as  he  chooses ;  he  must  do 
it  after  reasonable  notice  from  the  broker  so  to  do.  He  may  fur- 
nish it  from  shares  that  he  has  had  all  the  time  in  his  safe- 
deposit  box,  or  that  have  reached  him  from  abroad,  or  that  he 
has  received  under  a  contract,  or  that  he  has  bought  since  the 
sale. 

The  short  sale  in  which  the  seller  does  not  have  the  stock 
but  expects  to  buy  it  later  is  the  sort  that  is  sometimes  criti- 
cised. But  the  general  view  of  courts  and  economic  writers 
is  that  it  is  entirely  legitimate. 

The  Court  of  Appeals  of  New  York  says  in  Hurd  vs.  Tay- 
lor, 181  N.  Y.,  231  : 


51 

"  The  purchase  of  stocks  through  a  broker,  though 
the  party  ordering  such  purchase  does  not  intend  to 
hold  the  stocks  as  an  investment,  but  expects  the  broker 
to  carry  them  for  him  with  the  design  on  the  part  of  the 
purchaser  to  sell  again  the  stocks  when  their  market 
value  has  enhanced,  is,  however  speculative,  entirely 
legal.  Equally  so  is  a  '  short '  sale,  where  the  seller 
has  not  the  stock  he  assumes  to  sell,  but  borrows  it, 
and  expects  to  replace  it  when  the  market  value  has 
declined." 

In  Bibb  vs.  Allen,  149  U.  S.,  481,  the  Supreme  Court  of  the 
United  States  says  : 

"  It  is  well  settled  that  contracts  for  the  future 
delivery  of  merchandise  or  tangible  property  are  not 
void,  whether  such  property  is  in  existence  in  the  hands 
of  the  seller  or  to  be  subsequently  acquired." 

The  Court  quoted  with  approval  the  charge  of  the  trial 
Court  in  Irwin  vs.  Williar,  110  U.  S.,  Jfl9,  which  was  in  part 
as  follows  : 

"  A  person  may  make  a  contract  for  the  sale  of 
personal  property  for  future  delivery  which  he  has  not 
get.  Merchants  and  traders  often  do  this.  A  contract 
for  the  sale  of  personal  property  which  the  vendor  does 
not  own  or  possess,  but  expects  to  obtain  by  purchase 
or  otherwise,  is  binding  if  an  actual  transfer  of  prop- 
erty is  contemplated." 

The  Hughes  Commission  in  its  report  said  in  reference  to 
short  selling  : 

"  We  have  been  strongly  urged  to  advise  the  prohi- 
bition or  limitation  of  short  sales,  not  only  on  the 
theory  that  it  is  wrong  to  agree  to  sell  what  one  does 
not  possess,  but  that  such  sales  reduce  the  market 
price  of  the  securities  involved.  We  do  not  think  that 
it  is  wrong  to  agree  to  sell  something  that  one  does  not 


52 

now  possess,  but  expects  to  obtain  later.  Contracts 
and  agreements  to  sell,  and  deliver  in  the  future,  prop- 
erty which  one  does  not  possess  at  the  time  of  the  con- 
tract, are  common  in  all  kinds  of  business.  The  man 
who  has  '  sold-short  '  must  some  day  buy  in  order  to 
return  the  stock  which  he  has  borrowed  to  make  the 
short  sale.  Short-sellers  endeavor  to  select  times  when 
prices  seem  high  in  order  to  sell,  and  times  when  prices 
seem  low  in  order  to  buy,  their  action  in  both  cases 
serving  to  lessen  advances  and  diminish  declines  of 
price.  In  other  words,  short-selling  tends  to  produce 
steadiness  in  prices,  which  is  an  advantage  to  the  com- 
munity. No  other  means  of  restricting  unwarranted 
marking  up  and  down  of  prices  has  been  suggested 
to  us." 

These  views  accord  with  the  weight  of  authority  among 
economists,  and  their  further  elaboration  is  unnecessary. 

Legislation  to  limit  the  short  selling  of  securities  is  undesir- 
able and  it  would  be  ineffective.  Whenever  the  prices  of  secur- 
ities reach  a  point  where  men  believe  that  they  can  make  a  profit 
by  selling  them  they  will  make  such  sales,  and  no  legislation 
can  prevent  them  from  so  doing.  Such  legislation  might  drive 
the  business  away  ;  but  the  markets  of  Paris,  Montreal,  and, 
above  all,  the  London  market,  would  be  open  to  it.  As  be- 
tween the  markets  where  short  selling  is  permitted  and  markets 
where  it  is  prohibited,  the  former  will  be  the  predominant 
markets  and  draw  to  themselves  from  the  latter  much  of  their 
business  and  of  the  capital  employed  in  it.  This  was  the  ex- 
perience of  Germany  in  her  attempts  to  prohibit  short  selling  ; 
and  the  same  results  would  follow  from  any  similar  attempt 
made  here. 


53 

VII. 

Hypothecation. 

It  has  been  made  a  subject  of  criticism  that  the  Exchange  has 
no  rule  regulating  the  use  by  its  members  of  the  securities 
carried  by  them  for  their  customers. 

The  Exchange  has  not  undertaken  in  its  constitution  to 
set  out  the  law  of  principal  and  broker,  or  to  define  the  rights 
t  of  a  broker  in  respect  to  his  customer's  securities.  The  rights 
of  the  parties  in  respect  to  such  matters  are  fixed  by  the  law 
of  the  land,  and  it  would  be  impracticable  to  reproduce  the 
rules  of  which  that  law  consists  in  the  rules  of  the  Exchange. 

The  notion  that  the  Exchange  has  been  remiss  with  respect 
to  the  dealings  of  its  members  with  the  securities  of  their 
customers  in  pledging  them  to  raise  the  money  with  which  to 
carry  them  for  their  customers  is  based  upon  a  misconception 
of  the  relations  of  the  Exchange  to  those  dealings.  The 
transactions  of  purchase  and  sale  take  place  on  the  Ex- 
change and  are  governed  by  its  rules.  When  they  are  com- 
pleted and  the  stocks  bought  are  delivered  they  are  held  by 
the  broker  for  his  customer.  What  he  may  then  do  with 
them  is  not  a  matter  which  the  Exchange  can  determine, 
because  it  depends  upon  the  terms  of  any  arrangement  he 
may  have  with  the  customer,  or,  in  the  absence  of  any  such 
arrangement,  upon  his  legal  rights.  The  Exchange  has  no 
knowledge  of  those  arrangements,  and  no  authority  over  the 
legal  rights  of  the  broker.  Generally  speaking,  the  legal  right 
of  the  broker  is  to  pledge  the  stocks  for  the  amount  his 
customer  owes  on  them.  There  is  authority  for  saying 
that  he  has  the  further  right  to  pledge  the  stocks 
of  different  customers  in  mass  for  a  single  loan. 
(Mayer  vs.  Monzo,  151  App.  Div.,  866).  The  customer 
may  enlarge  these  rights,  as  is  the  usual  course. 
Everything  depends  so  much  upon  the  arrangements  and 


54 

relations  between  the  broker  and  his  customer  and  what  the 
course  of  dealing  may  have  been  between  them  that  it  is 
apparent  that  the  Exchange  has  but  little,  if  any,  power  or 
opportunity  of  intervention  or  control. 

If  any  member  of  the  Exchange,  in  dealing  with  the  secu- 
rities of  his  customer,  is  guilty  of  improper  conduct  he  is, 
upon  its  discovery,  subject  to  the  penalty  of  expulsion  under 
the  rules  which  have  been  already  cited.  The  Exchange  cannot 
act  until  the  fact  has  been  made  known  by  a  default  or  other 
disclosure,  unless  it  employed  a  numerous  body  of  examiners 
to  continuously  scrutinize  the  transactions  of  all  of  its  active 
members,  including  their  books  and  the  securities  pledged  for 
their  loans  ;  and,  in  addition,  ascertained  in  some  way  or  other 
what  were  the  arrangements  between  the  members  and  their 
customers.  It  is  obviously  impracticable  for  the  Exchange  to 
exercise  such  a  function  ;  and  there  is  absolutely  no  occasion 
for  it,  as  is  demonstrated  by  the  fact  that  the  losses  from  any 
misuse  of  securities  compared  with  the  total  volume  of  the 
transactions  are  infinitesimal.  The  criticism  of  the  Exchange 
on  this  ground  is  without  any  reasonable  basis. 


VIII. 

Particular  provisions  of  the  constitution  and 
rules  of  the  Exchange. 

(a)  The  minimum  rate  of  commission.  The  suggestion  that 
this  regulation  is  a  restraint  upon  interstate  commerce  in  viola- 
tion of  the  Sherman  Anti-Trust  Act,  is  answered  by  the  cases 
cited  under  Point  I. 

The  Exchange  has  fixed  the  rates  to  be  charged  by  its 
members  at  what  it  deems  to  be  fair  compensation.  To  permit 


55 

its  members  to  charge  less  than  a  fair  rate  would  result  in 
secret  rebates  and  concessions  to  large  customers;  and  might 
induce  members,  in  the  struggle  for  business,  to  offer  conces- 
sions which  they  could  not  afford.  So  far  as  the  public  is 
concerned  it  would  tend  to  the  advantage  of  the  large  as 
against  the  small  or  occasional  customer.  The  members  of 
the  Exchange,  like  members  of  the  professions,  compete  for 
business  with  one  another  by  each  one  endeavoring  to  estab- 
lish for  himself  a  reputation  for  business  judgment,  con- 
servatism and  rectitude,  and  not  by  the  commission  they 
charge. 

(b)  Limitation  of  membership.  Any  criticism  of  the  limita- 
tion of   membership  to  eleven  hundred  (1,100)  would  seem  to 
be  fanciful.     If   the  membership  is  at   any  time  not   sufficient 
to  transact   the  business  either  the  membership  must   be   in- 
creased or  the  business  will  go   elsewhere.     The  membership 
has  never  in  fact  proved  insufficient. 

(c)  The  rule  prohibiting  members  from  belonging  to  other 
Exchanges    in    the    City    of   New     York    which    permit    the 
trading  in  securities  that  are  also  dealt  in  upon  the  Exchange. 
The  sufficient  reason  for  this  rule  is  that  the  Exchange  deems 
it  reasonable   and  proper  that  its  members   should  not  belong 
to   Exchanges  that   directly  compete   with  it  as   markets  for 
business.     As  its   members   enjoy  the  benefit  of  the  market  it 
affords  each   member  should  contribute  his   business  to    that 
market  rather  than  to  a  rival  Exchange. 

( d)  Relations  to  Consolidated  Exchange.     The  whole  ques- 
tion as   to   the  relations  of   the  Exchange  to  the  Consolidated 
Exchange  was   involved  in  the  case   of   Heim  vs.   New    York 
Stock  Exchange,  the  opinion  in  which  has  been  handed  to  the 
Committee.       The  court  considered,  the  rule  prohibiting  the 
members  of  the  Exchange  from  transacting  business  for  active 
members  of  the  Consolidated  Exchange  and  held  that  it  was 
entirely  reasonable. 


56 

(e)  Preference  of  members.  The  rule  of  the  Exchange  to 
the  effect  that  upon  the  insolvency  of  a  member  the  proceeds 
of  his  membership  shall  be  applied  first  to  the  payment  of 
debts  due  to  other  members  is  just  and  reasonable.  The  value 
of  each  membership  is  in  effect  pledged  by  the  member 
to  his  fellow  members  to  secure  his  performance  of  any 
obligations  into  which  he  may  enter  with  them.  The 
purpose  of  this  mutual  pledge  is  to  enable  the  members 
to  deal  freely  with  each  other.  Business  between  the  mem- 
bers is  immensely  facilitated  by  the  rule,  because,  without  it, 
it  would  be  very  difficult  to  maintain  the  other  rule  whereby  a 
member  is  bound  to  close  a  contract  with  the  member  who 
first  accepts  his  bid  or  offer ;  that  is  to  say,  which  prevents 
members  from  choosing  with  whom  they  will  trade  among 
their  fellow  members.  This  system,  which  takes  away  from 
the  members  of  the  Exchange  the  right  to  select  those  with 
whom  they  will  contract,  is  necessary  to  the  maintenance  of  an 
open  market. 


IX. 

Striking  securities  from  the  stock  list. 

The  Exchange  was  called  upon  in  this  investigation  to  furnish 
a  list  of  all  the  securities  stricken  off  the  list  over  a  long  period 
of  years  and  the  amount  of  stock  in  each  corporation  stricken 
from  the  list  that  was  at  the  time  outstanding  in  the  hands  of 
minority  interests.  The  list  furnished  by  the  Exchange  shows 
that  the  Exchange  never  strikes  a  security  from  the  list  so  long 
as  a  substantial  proportion  of  the  stock  is  outstanding  in  the 
hands  of  the  public. 

There  is  danger  in  allowing  a  stock  to  remain  on  the  list 
when  only  a  small  proportion  of  it  is  outstanding  because  of  the 
temptation  to  ingenious  manipulation.  For  this  reason  the 


57 

Exchange  refuses  to  list  a  security  so  long  as  the  greater 
part  of  it  is  owned  by  a  single  interest.  The  same  reason 
requires  that  it  should  be  stricken  from  the  list  when  only  a 
small  proportion  remains  in  the  hands  of  the  public.  The 
testimony  of  Mr.  Mabon  and  Mr.  Pomroy  shows  further  that 
the  striking  of  securities  from  the  list  under  these  circum- 
stances works  no  injury  to  the  minority  holders.  The  ex- 
changeability of  this  minority  interest  under  the  terms  of  an 
agreement  of  consolidation  or  merger  insures  for  it  an  imme- 
diate market  value  for  purposes  of  sale  or  for  use  as  collateral 
security  ;  and,  as  has  been  shown,  there  is  no  difficulty  either 
in  selling  a  security,  or  in  borrowing  upon  it,  outside  of  the 
Exchange. 

We  submit  that  the  evidence  conclusively  shows  that  the 
power  to  strike  securities  from  the  list  has  not,  in  fact,  been 
used  so  as  to  coerce  the  owners  of  minority  interests ;  and  the 
composition  of  the  Governing  Committee  of  the  Exchange 
furnishes  the  strongest  sort  of  guarantee  that  it  will  never  be 
so  used. 


The  New  York  Bank  Note  Co. 

Representatives  of  the  New  York  Bank  Note  Company 
have  been  allowed  to  appear  as  witnesses  and  have  made  the 
charge  that  the  Exchange  in  refusing  to  list  the  securities  en- 
graved by  the  New  York  Bank  Note  Company  is  actuated  by 
the  desire  to  promote  the  interests  of  the  American  Bank  Note 
Company. 

In  a  case  which  has  long  been  pending  in  the  Federal 
Court  in  the  Southern  District  of  New  York  the  same  charge 
made  by  the  New  York  Bank  Note  Company  is  denied  by 
the  Exchange.  The  reasons  of  the  refusal  of  the  Exchange  to 


58 

list  securities  engraved  bj  the  New  York  Bank  Note  Company 
as  set  out  in  its  answer  to  that  suit  are  as  follows  : 

"  Since  the  organization  of  the  New  York  Stock 
Exchange  said  Exchange  has  admitted  to  the  list  of 
securities  that  may  be  dealt  in  on  the  floor  of  the 
Exchange  by  its  members  only  such  securities  as  said 
Exchange  has  judged  it  proper  so  to  admit,  and  ha& 
required  that  issues  of  securities  sought  to  be  listed 
upon  the  Exchange  should  be  engraved,  and  has  made 
such  requirements  in  respect  to  the  engraving  thereof 
as  in  the  judgment  of  the  Exchange  were  necessary  or 
proper  to  prevent  the  forgery  of  securities  dealt  in  on 
the  Exchange,  or  the  improper  use  of  the  plates  used  in 
engraving  such  securities,  and  to  insure  that  all  of  such 
securities  in  respect  to  engraving,  paper,  ink,  printing 
and  in  all  other  details  should  conform  to  the  standard 
sought  to  be  maintained  by  the  Exchange  in  respect  to 
securities  listed  upon  said  Exchange. 

"  Ever  since  a  period  long  prior  to  the  times  men- 
tioned in  the  amended  complaint  the  Exchange  has 
deemed  it  necessary  for  the  purposes  aforesaid  to  re- 
^quire  that  securities  sought  to  be  listed  upon  the 
Exchange  should  be  engraved  by  engraving  companies 
whose  qualifications  in  respect  to  financial  responsi- 
bility, character  of  direction  and  management,  general 
features  and  quality  of  workmanship,  general  methods 
of  business,  and  in  all  other  respects  were  such  in  the 
judgment  of  the  Exchange  as  to  furnish  a  reasonable 
assurance  that  the  securities  engraved  by  them  would 
conform  to  the  standard  sought  to  be  maintained  by  the 
Exchange,  and  that  forgery  and  misuse  of  plates  would 
be  prevented,  and,  therefore,  the  Exchange  has  re- 
quired that  the  securities  of  all  issues  sought  to  be 
listed  upon  the  Exchange  should  be  engraved  by  com- 
panies whose  qualifications  have  been  approved  by  the 
Exchange. 

"  The  New  York  Bank  Note  Company  was  organized 
under  the  laws  of  West  Virginia  in  the  year  1892,  and 
at  various  times  since  its  organization  has  applied  to 


59 

the  New  York  Stock  Exchange  to  have  its  qualifications 
approved  by  said  Exchange,  and  its  representatives 
have  from  time  to  time  appeared  before  the  authorities 
of  the  Exchange  and  have  been  accorded  hearings  in 
respect  to  the  qualifications  of  said  Company,  but,  in 
the  judgment  of  the  Exchange,  said  Company  has 
failed  to  show  that  its  qualifications  were  such  as  to 
justify  the  approval  thereof  by  the  Exchange  and  that 
the  Exchange  has  not  approved  said  Company  or 
authorized  the  Committee  on  Stock  List  to  pass  upon 
securities  engraved  by  said  Company.  For  the  reasons 
aforesaid  no  securities  engraved  by  the  plaintiff  have 
ever  been  admitted  to  the  stock  list  of  the  New  York 
Stock  Exchange,  and  the  Committee  on  Stock  List  has 
refused  to  pass  upon  specimens  of  the  plaintiff's  en- 
graving work." 

For  several  years  prior  to  the  year  1892  securities  engraved 
by  the  New  York  Bank  Note  Company  of  New  Jersey  were  ad- 
mitted to  the  Stock  List.  The  manager  of  the  Company  was 
George  H.  Kendall,  who  is  now  president  of  the  New  York 
Bank  Note  Company  of  West  Virginia.  The  experience  of 
the  Exchange  with  the  New  Jersey  Company  under  Kendall's 
management  was  very  unsatisfactory.  In  1892  the  New  Jersey 
Company  went  out  of  business  and  the  New  York  Bank  Note 
Company  of  West  Virginia  was  organized.  All  or  substan- 
tially all  of  its  stock  has  always  been  owned  by  Kendall.  It  ha& 
a  capital  of  ten  thousand  ($10,000)  dollars  divided  into  ten 
thousand  shares  of  one  ($1)  dollar  each.  No  securities  en- 
graved by  it  have  ever  been  admitted  to  the  Stock  List. 

In  1892  and  for  many  years  thereafter  there  were,  besides 
the  American  Bank  Note  Company,  several  engraving  com- 
panies entirely  independent  of  the  American  whose  work  was 
admitted  to  the  Stock  List.  These  companies  were  eventually 
acquired  by  the  American.  Since  they  were  so  acquired  the 
Stock  List  Committee  has  been  authorized  to  pass  upon  the 
work  of  other  companies  which  are  entirely  independent  of  the 


60 

American,  and  there  are  now  four  such  companies  whose  work 
is  admitted  to  the  Stock  List. 

Stock  of  the  American  Bank  Note  Company  held  from  time 
to  time  by  members  of  the  Exchange  for  their  customers 
often  stands  in  their  names.  A  few  members  in  no  way  con- 
nected with  the  management  of  the  Exchange  own  some  of 
the  stock,  amounting  in  the  aggregate  to  a  small  fraction  of 
the  total  issue. 

The  suggestion  that  the  forty  members  of  the  Governing 
Committee  of  the  Exchange,  who  represent  the  interests  of  its 
eleven  hundred  members  and  are  elected  by,  and  are  responsi- 
ble to,  those  eleven  hundred  members,  have  excluded  securi- 
ties from  the  Stock  List  for  the  purpose  of  advancing  the 
personal  interest  of  half  a  dozen  members  who  happen  to 
own  a  small  part  of  the  stock  of  the  American  Bank  Note 
Company,  is  too  absurd  for  serious  consideration. 


XI. 

The  Exchange  is  not  dominated  by  any  indi- 
viduals or  groups  of  individuals  as  recited  in  the 
resolution  authorizing  this  investigation. 

The  powers  of  the  Exchange  have  never  been  used  for  the 
promotion  of  any  private  interest  or  for  the  special  advantage 
of  any  particular  individual  or  group  of  individuals.  These 
powers  have  been  exercised  solely  with  a  view  to  the  inter- 
est and  welfare  of  the  Exchange  and  the  promotion  of  the 
purposes  set  forth  in  its  constitution. 

The  Exchange  has  no  special  relations  to  the  persons  and 
groups  referred  to  in  the  resolution  of  Congress  or  to  their 
financial  transactions  ;  and  its  only  relation  to  the  financial 


61 

and  commercial  system  of  the  country  is  that  it  is  the  place 
where  a  great  proportion  of  the  trading  in  securities  is  carried 
on. 

Because  the  Exchange  is  a  great  market  for  active 
securities  the  first  symptoms  of  business  distrust  and 
disturbance  become  apparent  upon  its  floor.  Though  it  is  a 
fact  that  a  large  volume  of  securities  is  carried 
on  call  loans  obtained  from  the  banks  and  that  the 
first  symptom  of  a  stringency  in  the  money  market  is  the 
rise  in  the  rate  of  call  money,  the  responsibility  for  the 
conditions  that  bring  about  a  recurrent  stringency  in  the 
money  market  does  not  rest  upon  the  traders' in  securities  or 
the  Exchange.  They  are  due  to  the  non- elasticity  of  our 
currency  system  and  the  fact  that  its  volume  continues  sub- 
stantially the  same  irrespective  of  the  demands  of  business. 
But  we  will  refrain  from  entering  upon  a  discussion  of  the 
currency  system  of  the  country  if  for  no  other  reason  than  that 
this  brief  is  already  too  long. 

JOHN  G.  MILBURN, 

WALTER  F.  TAYLOR, 

Counsel  for  the  New  York 

Stock  Exchange. 


[9253] 


INDEX. 


PAGE 

Accounts  of  clerks  and  employes,  prohibited 9 

Advertisements,    legislation     recommended    by    Hughes 

Commission 10 

Arbitration  of  disputes  between  members 22,  23 

Bankruptcy  acts 20 

Books    and    accounts    of    members,  recommendation  of 

Hughes  Commission 8 

attitude  of  Governors 8 

Branch  offices 10 

Brown,  Judge   Charles  F.,  opinion  in  re  Stock  Exchange 

Quotations 18,  19 

Bucket  shops 3,  7,  16 

Clearing  House,  New  York  Stock  Exchange,  approved  by 

Hughes  Commission 7 

Clearing  sheets  of  Brokers 10 

Congress,  power  of,  affecting  Stock  Exchange- 16 

Commission,  minimum  rate  of 54 

relationship  to  interstate  commerce 54 

Consolidated  Exchange 55 

Constitution  and  rules,  opinion  of   Governors    as   to    effi- 
cacy of 23 

Corners,  opinion  of   Hughes  Commission ; 8 

attitude  of  Governors 8 

Commercial  Telegram  Company 17 

Corporations,  annual  reports  of , , 6 

Currency  system 61 

Decisions  of  Courts  : 

Hopkins  vs.  United  States,  171  U.  S.  578 11 

Anderson  vs.  United  States,  171  U.  S.  604 11 

Ware  &  Leland  vs.  Mobile  County,  209  U.  S.  405__  15 

New  York  ex  rel  Hatch  vs.  Beardou,  204  U.  S.  152_  16 


II 

PAGE 

Board   of   Trade  vs.  Christie  Grain  &  Stock   Com- 
pany, 198  U.  S.  236 17 

Commercial    Telegram    Company    vs.    Smith,    47 

Hun,  494_ __ 17 

Wilson,  as  President  of  the  Consolidated  Exchange, 

vs.  Smith,  18  N.  Y.  State  Eep.,  78 18 

Hyde  vs.  Woods,  94  U.  S.,  523 20 

People  ex  rel.   Johnson  vs.  New  York  Produce  Ex- 

149  N.  Y.,  401__. 27 

Haebler   vs.    New   York    Produce    Exchange,    149 

N.Y.,  414.,--- 27 

White  vs.  Brownell,  2  Daly,  329 30 

Lewis  vs.  Wilson,  121  N.  Y.,  284 31 

Neukirch  vs.  Keppler,  56  App.  Div.,  225 31 

Young  vs.  Eames,  78  App.  Div.,  229 31 

Wilson  vs.  Smith,  18  N.  Y.  State  Kep.,  78 36 

Hurd  vs.  Taylor,  181  N.  Y.,  231 50 

Bibb  vs.  Allen,  149  U.  S.,  481 _.. 51 

Irwin  vs.  Williar,  110  U.  S.,  499 51 

Mayer  vs.  Monzo,  151  App.  Div.,  866 53 

Heim  vs.  New  York  Stock  Exchange 55 

Discipline  of  Members,  as  affected  by  incorporation 29 

as  affected  by  judicial  review 32 

Emery,  Henry  Crosby,  "  Should  speculation  be  regulated 

bylaw?" . 42  et  seq. 

Failures  of  Members,  ratio  of 25 

Federal  jurisdiction ,_ 11  et  seq. 

Fictitious  transactions  forbidden 22 

German  experience  with  repressive  legislation 52 

Governing  Committee,  attitude  toward  manipulation 48,  49 

Hughes  Commission  : 

Its  functions 7 

Its  conclusions 7 

Margins,  suggestions  as  to 7 

Stock  exchange  action 8 

On  manipulation 8,  46,  47 

On    corners 8 

On  examination  of   Members' books 8 

On  hypothecation  of  securities 8 


Ill 

PAGE 

On  accounts  of  clerks   and  employes 9 

On  Unlisted  Department 9 

On  unit  of   trading ; 9 

On  clearing  sheets 10 

On  branch  offices 10 

On  misleading  advertisements 10 

On  incorporation 26 

On  short  selling 51,52 

Hypothecation  of  securities  by  Brokers  : 

Recommendation  of  Hughes  Committee 8 

Attitude  of  Stock  Exchange 53 

Powers  of  Governors  over  Members 53,  54 

Incorporation  of  the  Stock  Exchange  : 

Disapproved  by  Hughes  Commission 7,  26 

Discussion  of 26  et  seq. 

Meaning  of  as  applied  to  Stock  Exchange 26,  27 

Decisions  of  New  York  Courts 27 

What  is  involved 28 

Unnecessary  to  enforcement  of  existing  laws. 28 

In   relation  to   discipline    of   members   and    their 

solvency 29 

Its  impracticability  summarized ____.29,  30 

Discipline  as  affected  by  judicial  review 32 

Competency  of   Governing   Committee   contrasted 

with  Courts  in  matter  of  discipline 32 

Ability  of  Governors  in  listing  of  securities 33 

Transitory  nature  of  charter 34 

Non-  existence  of  monopoly 35 

Injustice  of  forced  incorporation.. ._„ 36 

As  affecting  value  of  memberships 36 

As  interfering  with  rights  of  members 37 

Difficulties  of  legislation .  _ .  .37,  38 

Interstate  or  Foreign  Commerce  : 

Relation  of  Stock  Exchange  to . 11  et  seq. 

Rates  of   commission 54,  55 

Interest,  high  rates  due  to  currency  system 61 

usury  law,  repeal  inadvisable 7 

Journal  of  Accountancy,  on  speculation .  .4%  et  seq. 

Legislation,   effectiveness  of 37 


IV 

PAGE 

Listing  of  securities  : 

Requirements  for _ 6 

Judicial  review  inappropriate 33 

Value  of 36 

Amount  of  securities  listed __  5,  35 

Powers  of  the  Committee 48 

Striking  securities  from  list 56,  57 

Manipulation  : 

Discussed  by  Hughes  Commission 8 

False  impressions  as  to  extent  of .. 44 

Volume  of  transactions 44 

Definition  of 45 

Analysis  of  various  forms 45 

Opinion  of  Hughes  Commission 46,  47 

Plans  of  Governors  to  cope  with 46,  47 

Relation  of  Brokers  thereto 47 

Existing  rules  of  the  Exchange  in  restraint  of 48,  49 

What  has  already  been  accomplished 48,  49 

"  Matched  "  orders,  forbidden '22,  24,  46,  47,  48 

Margin  transactions : 

Suggestion  of  Hughes  Commission 7 

Approved  by  Hughes  Commission 7 

Memberships,  transfers  of __19,  20 

Rules  of  Exchange  as  to  application  of  proceeds.  .19,  20 

Opinion  of  Supreme  Court 20,  21 

Preference  of  Members 56 

Monopoly,  non-existent 35,  36 

of   Exchange  quotations,  opinion   of   Supreme 
Court 17 

New  York  Bank  Note  Company  — 57  et  seq. 

New  York  Quotation  Company 3 

New  York  Stock  Exchange  (see  "  Stock  Exchange  "). 

New  York  Stock  Exchange  Building  Company 3 

Peckham,  Mr.  Justice,  opinion    in  re  interstate  commerce 
and  exchanges 12  et  seq. 

Preference  of  Members  in  proceeds  of  membership 56 

Pyramiding 8 

Quotations:  How  furnished 3 

Restrictions  approved  by  Hughes  Commission —       7 
Court   decisions-.  17 


V 

PAGE 

Kates  of  money  as  affected  by  currency  system 61 

Regulation  and  control  of   the  Stock  Exchange  by  incor- 
poration   26 

(See  "  Incorporation.") 

Regulation  of  Exchange  : 

Power  of  State  conceded 37 

Power  of  Congress  and  of  the  State 37 

Resolution  of  the  House  of  Representatives,    No.  504 1 

Rules  of  Stock  Exchange,  as  affected  by  incorporation 29 

Manipulation . 48  et  seq. 

Penalties    for     improper     use     of    securities    by 

Brokers 54 

Rates  of  commission 55 

Membership  in  other  exchanges 55 

Securities,   volume  of 35 

Proportion  of,  listed  on  Stock   Exchange 5-35 

Sherman    Anti-Trust   Act 11  et  seq.,  14,  54 

Short  Sales : 

Approved  by  Hughes  Commission 7 

Definition  of 49 

Various  kinds    of 50 

Opinions  of  Courts  and  economic  writers 50,  51,  52 

Effect  of  legislation 52 

Experience  of   Germany 52 

Speculation,  volume  of,  on  Stock  Exchange 38 

Deductions  therefrom 38  et  seq. 

Analysis  of 39 

Necessary  to  broad    markets 41 

Should  it  be  regulated   by  law 42  et  seq. 

Stock  Exchange : 

Number  of  Members 2 

Object  of 3 

Property  owned  by 3 

Sources  of  income 3 

Quotations 3 

Transactions _ 4 

Rules 4 

Margin  transactions 4 

Brokers  and  customers,  agreement  between 4 

Delivery  of  securities „  5 


VI 

PAGE 

Number  of  issues  listed __. 5 

Rules  as  to  transfers  of  membership •__  19 

"      as  to  preferred  creditors 20 

Facilities  for  convenient  transaction  of  business 21 

Commercial  honor  and  integrity  of  Members 21 

Object  of  Exchange  as  defined  by  Constitution 21 

Prohibition  of  fictitious  transactions 22 

Resolutions  concerning  unit  of  trading 22 

Arbitration  of  disputes 22 

Insolvency  of  members 22 

Arbitration  Committee 23 

Opinion  of  Governors  as  to  efficacy  of  rules 23 

Standards  of  business  integrity  maintained 23,  24 

"  Matched  "  orders  and  "  wash  "  sales * 24 

Settlement  of  disputes  between  Members ._.  24 

Repudiation  unknown „ 25 

Fidelity  of  Members  to  customers 25 

Failure  of  Members,  ratio   of 25 

Requirements  as  to  listing 6 

Relationship    in    law    between    Brokers  and  cus- 
tomers  ...53,  54 

Limitation  of  Mem  berships 55 

Volume  of  business  as  affecting  money  rates 61 

Stock   Exchange   Clearing  House,   approved   by  Hughes 

Commission 7 

Stock  Transfer  Tax _.  16 

Unit  of  trading 9 

Unlisted  Department ,  abolition  of 9 

Unlisted  Securities,  freedom  of  Members  to  deal  in ,  __  5 

Unwisdom  of  judicial  review  in  listing  securities 33 

Usury  law,  repeal  of  disapproved  by  Hughes  Commission  7 
Van  Brunt,  Mr.  Justice,  opinion  of  in  re  rights  of  private 

associations 17 

Van  Vorst,  Mr.  Justice,  opinion   of   as   to   voluntary  and 

involuntary  associations 31 

Voluntary  and  involuntary  associations,  defined  by  Court.  31 

"  Wash''  Sales  forbidden ...."...  22,  24,  48 

Western    Union    Telegraph    Company,    agreement   with 

Stock'Exchange ., 16 


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